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Credit Supply Shocks and Firm Dynamics: Evidence from Brazil

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  • Bazzi, Samuel
  • Muendler, Marc
  • de Freitas Oliveira, Raquel
  • Rauch, James E.

Abstract

We explore how financial constraints distort the entry decisions among otherwise productive entrepreneurs and limit growth of promising young firms. A model of liquidity-constrained entrepreneurs suggests that the easing of credit constraints can induce more entry of firms with greater long-run growth potential than the easing of conventional entry barriers would bring about. We explore this growth mechanism using a large-scale program to expand the supply of credit to small and medium enterprises in Brazil. Local credit supply shocks generate greater firm entry but also greater exit with no effect on short-run employment growth in the formal sector. However, credit expansions increase average capability among entering firms, which enter at larger size, survive longer, and grow faster. These firm dynamics are more pronounced in areas with weaker credit markets ex ante and consistent with local bank branches using cheap targeted credit lines to expand lending more broadly. Our findings provide new evidence on the general equilibrium effects of credit supply expansions.

Suggested Citation

  • Bazzi, Samuel & Muendler, Marc & de Freitas Oliveira, Raquel & Rauch, James E., 2023. "Credit Supply Shocks and Firm Dynamics: Evidence from Brazil," CEPR Discussion Papers 18503, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18503
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    References listed on IDEAS

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    1. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-827, August.
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    Cited by:

    1. Fonseca, Julia & Matray, Adrien, 2024. "Financial inclusion, economic development, and inequality: Evidence from Brazil," Journal of Financial Economics, Elsevier, vol. 156(C).

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    More about this item

    Keywords

    Startups;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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