Black Entrepreneurs, Job Creation, and Financial Constraints

43 Pages Posted: 29 May 2021

See all articles by Mee Jung Kim

Mee Jung Kim

Sejong University

Kyung Min Lee

World Bank; George Mason University - Schar School of Policy and Government

J. David Brown

US Census Bureau Center for Economic Studies; IZA Institute of Labor Economics

John S. Earle

George Mason University - Schar School of Policy and Government; IZA Institute of Labor Economics

Abstract

Black-owned businesses tend to operate with less finance and employ fewer workers than those owned by Whites. Motivated by a simple conceptual framework, we document these facts and show they are causally connected using large firm-level surveys linked to universal employer data from the Census Bureau. We find that the racial financing gap is most pronounced at start-up and tends to narrow with firm age. At any age, Black-owned firms are less likely to receive bank loans, more likely to refrain from applying because they expect denial, and more likely to report that lack of finance reduces their profitability. Yet the observable characteristics of Black entrepreneurs are similar in most respects to Whites, and in some ways - higher education, growth-oriented motivations, and involvement in the business - would seem to imply higher, not lower, demand for finance. Concerning employment, we find that Black-owned firms have on average about 12 percent fewer employees than those owned by Whites, but the difference drops when controlling for firm age and other characteristics. However, when the analysis holds financial variables constant, the results imply that equally well-financed Black-owned firms would be larger than White-owned by about seven percent. Exploiting the credit supply shock of changing assignment to Community Reinvestment Act treatment through a Regression Discontinuity Design in a firm-level panel regression framework, we find that expanded credit access raises employment 5-7 percentage points more at Black-owned businesses than White-owned firms in treated neighborhoods.

JEL Classification: J15, G20, H81

Suggested Citation

Kim, Mee Jung and Lee, Kyung Min and Brown, J. David and Earle, John S., Black Entrepreneurs, Job Creation, and Financial Constraints. IZA Discussion Paper No. 14403, Available at SSRN: https://ssrn.com/abstract=3855967 or http://dx.doi.org/10.2139/ssrn.3855967

Mee Jung Kim (Contact Author)

Sejong University ( email )

209, Neungdong-ro, Gwangjin-gu
Seoul, 05006
Korea, Republic of (South Korea)

Kyung Min Lee

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

George Mason University - Schar School of Policy and Government ( email )

Founders Hall, Fifth Floor
3351 Fairfax Drive, MS 3B1
Arlington, VA 22201
United States

J. David Brown

US Census Bureau Center for Economic Studies ( email )

4600 Silver Hill Road
Washington, DC 20233
United States
301-763-8769 (Phone)
301-763-5935 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

John S. Earle

George Mason University - Schar School of Policy and Government ( email )

3351 Fairfax Drive
MS 3B1
Arlington, VA 22201
United States
703-993-8023 (Phone)

HOME PAGE: http://earle.gmu.edu

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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