Small Firm Credit Market Discrimination, SBA-Guaranteed Lending, and Local Market Economic Performance

40 Pages Posted: 19 Oct 2007

See all articles by Ben R. Craig

Ben R. Craig

Federal Reserve Bank of Cleveland; Deutsche Bundesbank

William E. Jackson

Culverhouse College of Business, University of Alabama

James B. Thomson

University of Akron

Date Written: November 2006

Abstract

We empirically test whether SBA-guaranteed lending has a greater impact on economic performance in markets with a high percentage of potential minority small businesses. This hypothesis is predicated on priors related to three overlapping assumptions. These three assumptions are: (1) The classic type of credit rationing developed in the seminal paper by Stiglitz and Weiss (1981) is more likely to occur in markets with a higher per capita percentage of minority small businesses because such markets are more likely to have more severe information asymmetry problems, (2) SBA-guaranteed lending is likely to reduce these credit rationing problems - thus improving the level of development of the local financial market, and (3) increased local financial market development helps to lubricate the wheels of economic performance (Rajan and Zingales, 1998). Using local labor market employment rates as our measure of economic performance, we find evidence consistent with this proposition. In particular, we find a positive and significant impact on the average annual level of employment in a local market of SBA-guaranteed lending in that local market. This impact is 200 percent larger in markets with a high percentage of potential minority small businesses. This result has important implications for public policy in general and SBA-guaranteed lending in particular.

Keywords: discrimination, employment rates, small firm credit markets, loan guarantees, credit rationing

JEL Classification: G38, H81, J15, O16

Suggested Citation

Craig, Ben R. and Jackson, William E. and Thomson, James B., Small Firm Credit Market Discrimination, SBA-Guaranteed Lending, and Local Market Economic Performance (November 2006). FRB of Cleveland Working Paper No. 06-13. Available at SSRN: https://ssrn.com/abstract=1022187 or http://dx.doi.org/10.2139/ssrn.1022187

Ben R. Craig

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101
United States
216-579-2061 (Phone)
216-579-3050 (Fax)

Deutsche Bundesbank

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

William E. Jackson

Culverhouse College of Business, University of Alabama ( email )

Tuscaloosa, AL 35487-0225
United States
205.348.6217 (Phone)
205.348.6695 (Fax)

James B. Thomson (Contact Author)

University of Akron ( email )

Akron, OH 44325-4803
United States

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