Unintended Side Effects: Stress Tests, Entrepreneurship, and Innovation
51 Pages Posted: 17 May 2019 Last revised: 18 Jul 2019
Date Written: July 15, 2019
This paper shows that post-crisis stress tests have negative side effects on entrepreneurship and innovation. Banks subject to stress tests strongly cut small business loans secured by home equity, an important source of financing for entrepreneurs. Lower credit supply leads to a relative decline in entrepreneurship during the recovery in counties with higher exposure to stress tested banks. The decline is stronger in sectors with a higher share of young firms using home equity financing, i.e. where the reduction in credit hits hardest. Counties with higher exposure also see a decline in patent applications by young firms, but not by old. I provide suggestive evidence that the decline in entrepreneurship due to a lack in credit negatively affects labor productivity, reflecting young firms' disproportionate contribution to growth.
Keywords: stress tests, small business lending, entrepreneurship, innovation, productivity slowdown
JEL Classification: G20, G21, L26
Suggested Citation: Suggested Citation