Regulatory Risk Perception and Small Business Lending
92 Pages Posted: 16 Aug 2021 Last revised: 22 Jun 2022
Date Written: August 12, 2021
We uncover a significant friction in small business lending: perception of risk by Small Business Administration employees. Using novel data on SBA employees transferring across offices, we find that defaults on SBA loans in their previous location reduce SBA loans and job creation in their current location. The effect is independent of local economic conditions and the informational content of the non-local defaults, suggesting that SBA employees update their risk assessment irrationally. Our results are the first to document that regulators' potential misperception of economic conditions affects the ability of small businesses to obtain access to finance.
Keywords: regulatory incentives, risk perception, government guarantees, small business lending, default risk
JEL Classification: D02, D73, G28, G41
Suggested Citation: Suggested Citation