Unintended Side Effects: Stress Tests, Entrepreneurship, and Innovation

51 Pages Posted: 17 May 2019 Last revised: 18 Jul 2019

See all articles by Sebastian Doerr

Sebastian Doerr

University of Zurich - Department of Economics; University of Zurich - UBS International Center of Economics in Society

Date Written: July 15, 2019

Abstract

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

Doerr, Sebastian, Unintended Side Effects: Stress Tests, Entrepreneurship, and Innovation (July 15, 2019). Available at SSRN: https://ssrn.com/abstract=3384006 or http://dx.doi.org/10.2139/ssrn.3384006

Sebastian Doerr (Contact Author)

University of Zurich - Department of Economics ( email )

Schönberggasse 1
Office G-05
Zürich, 8001
Switzerland

HOME PAGE: http://www.sdoerr.com

University of Zurich - UBS International Center of Economics in Society

Schönberggasse 1
Zürich, 8001
Switzerland

Register to save articles to
your library

Register

Paper statistics

Downloads
32
Abstract Views
196
PlumX Metrics