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Aggregate Business Failures and Federal Credit Activity

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  • Robert B. Archibald
  • Samuel H. Baker

Abstract

We build and test a model of aggregate business failures that explicitly accounts for the role of federal credit programs, as well as private lending decisions. The model focuses on federal credit activities directed at potentially failing firms as well as forecasting errors by lenders, business balance sheet fragility, and business starts. We construct an adjusted business failure rate with two multiplicative components—the unadjusted business failure rate and the average size of failing firms. Our results suggest that federal credit activities have two unintended effects: Direct loan programs allocate funds to firms that are more viable than those crowded out, and loan guarantee programs increase the average size of failing firms by permitting small firms to grow and become larger failures. In addition, we find that balance sheet fragility interacted separately with both firm-specific errors and errors concerning aggregate profitability and that credit availability explains the adjusted business failure rate.

Suggested Citation

  • Robert B. Archibald & Samuel H. Baker, 1988. "Aggregate Business Failures and Federal Credit Activity," Public Finance Review, , vol. 16(2), pages 219-243, April.
    • Handle: RePEc:sae:pubfin:v:16:y:1988:i:2:p:219-243
    DOI: 10.1177/109114218801600205
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    References listed on IDEAS

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