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
Date Written: May 30, 2019
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: Suggested Citation