Trading Credit (Subsidies) for Votes: The Effect of Local Politics on Small Business Lending

76 Pages Posted: 7 Jun 2019

See all articles by Sahil Raina

Sahil Raina

Alberta School of Business, University of Alberta

Sheng-Jun Xu

University of Alberta - School of Business

Date Written: May 30, 2019

Abstract

Small businesses are championed by politicians looking to win votes, but face significant credit constraints that limit their growth. We study how the competitiveness of congressional elections affects government subsidies to small business lending. To identify the causal impact of electoral competitiveness, we examine politically-motivated congressional redistricting ("gerrymandering") and exploit the discontinuity in post-redistricting electoral competitiveness between districts where redistricting party incumbents narrowly won and narrowly lost the pre-redistricting election. We find that districts with electorally vulnerable congressional representatives receive larger Small Business Administration (SBA) loan guarantees than districts with more entrenched representatives, and this leads to higher growth in local employment and wages in the short run. The gains in employment and wages disappear in the long run, and is accompanied by a decline in the number of business establishments. Overall, our results suggest that politically-motivated credit subsidies to small businesses can provide short-term economic benefits, but may distort local credit markets in the long run.

Keywords: small business finance, political economy, gerrymandering, redistricting, credit subsidies

JEL Classification: P16, H81, G28, D72

Suggested Citation

Raina, Sahil and Xu, Sheng-Jun, Trading Credit (Subsidies) for Votes: The Effect of Local Politics on Small Business Lending (May 30, 2019). University of Alberta School of Business Research Paper No. 2019-505. Available at SSRN: https://ssrn.com/abstract=3396699 or http://dx.doi.org/10.2139/ssrn.3396699

Sahil Raina

Alberta School of Business, University of Alberta ( email )

2-32B Business Building
Edmonton, Alberta T6G 2R6
Canada

HOME PAGE: http://sites.ualberta.ca/~sraina/

Sheng-Jun Xu (Contact Author)

University of Alberta - School of Business ( email )

2-43 Business Building
Edmonton, Alberta T6G 2C7
Canada

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