Does SBA Guaranteed Lending Improve Economic Performance in Low-Income Areas?

38 Pages Posted: 4 Sep 2008

See all articles by William E. Jackson

William E. Jackson

Culverhouse College of Business, University of Alabama

Ben R. Craig

Federal Reserve Bank of Cleveland; Deutsche Bundesbank

James B. Thomson

University of Akron

Date Written: January 1, 2006

Abstract

Recent studies have provided evidence that financial market development leads to higher rates of economic growth. This is further investigated by focusing on the rationale that financial market development may increase the amount of external finance available to small firms. In particular, a test of whether Small Business Administration (SBA) guaranteed lending positively impacts economic performance in low-income markets is conducted.

It is hypothesized that credit market frictions, that is, costly information-gathering and verification of a small firm's project, lead to socially suboptimal credit allocation that negatively impacts the labor employment rate in the local market. If SBA guaranteed lending mitigates credit market frictions, a positive relationship should be seen between SBA guaranteed lending and level of employment, particularly in low-income financial markets. Loan-specific data on the borrower and lender was obtained from 1991 through 2002, including 360,000 loans. Economic data were also obtained for that time period.

Results show a positive and significant correlation between the average annual level of employment in a local market and the level of SBA guaranteed lending that market. The intensity of the correlation increases for low-income markets.

Keywords: Credit discrimination, Credit rationing, Economic development, Employment rates, Lending policies, Loans, Low income groups, U.S. Small Business Administration (SBA)

JEL Classification: G38, H81, O16

Suggested Citation

Jackson, William E. and Craig, Ben R. and Thomson, James B., Does SBA Guaranteed Lending Improve Economic Performance in Low-Income Areas? (January 1, 2006). Available at SSRN: https://ssrn.com/abstract=1244666 or http://dx.doi.org/10.2139/ssrn.1244666

William E. Jackson (Contact Author)

Culverhouse College of Business, University of Alabama ( email )

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

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

James B. Thomson

University of Akron ( email )

Akron, OH 44325-4803
United States

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