Short-Term Credit Costs and U.S. Entrepreneurship

We study how variation in short-term credit costs shapes U.S. entrepreneurship. To do so, we implement identification through heteroskedasticity on a new index of daily U.S. firm formation from 1988 to 2014. A one percentage point increase in the 3-month T-Bill is associated with a 6.4% drop in the number of new firms founded, and a 3.2% drop in the quality-adjusted quantity of new firms founded, seven days later. The results are robust to economic policy uncertainty, recession periods, and to multiple heteroskedasticity regimes. The rate of firm formation gets back to baseline six weeks after the shock, and there is no corresponding overcompensation, suggesting the loss is permanent.