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

58 Pages Posted: 7 Jun 2019 Last revised: 20 May 2020

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 seeking votes. We study how the competitiveness of congressional elections affects small business loan subsidies. 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 the redistricting party narrowly won and lost the pre-redistricting election. Using our novel regression discontinuity design, we find that districts with more vulnerable congressional representatives receive larger Small Business Administration (SBA) loan guarantees and lower interest rates on SBA loans. This increased lending is accompanied by higher rates of employment growth, particularly in the manufacturing sector, and greater concentrations of labor and capital in a smaller number of establishments. Overall, our findings indicate that local politics affect the allocation of government-subsidized credit, and that larger businesses and politically-important industries capture larger shares of the resulting gains.

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

JEL Classification: G28, G21, P16, H81, 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). Proceedings of Paris December 2019 Finance Meeting EUROFIDAI - ESSEC, 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 )

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

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