Trading Credit (Subsidies) for Votes: The Effect of Local Politics on Small Business Lending
76 Pages Posted: 7 Jun 2019 Last revised: 6 Dec 2019
Date Written: May 30, 2019
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 candidates 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: Suggested Citation