Organized Labor and Loan Pricing: A Regression Discontinuity Design Analysis

Abstract

This paper provides new evidence on the effect of unionization on cost of bank loans. By using a regression discontinuity design, we establish a causal relation from new unionization to bank loan pricing. Relative to firms in which unions barely lose elections, firms in which unions barely win elections experience an increase in the spread of the newly originated loans. Further tests suggest that the effect of labor unions on loan spread is through reducing recovery rate of banks in bankruptcy rather than increasing firms' default risk.

Keywords: labor unions, bank loans, regression discontinuity design

JEL Classification: G32, J51