Regulatory Risk Perception and Small Business Lending

83 Pages Posted: 16 Aug 2021 Last revised: 21 Dec 2021

See all articles by Joseph Kalmenovitz

Joseph Kalmenovitz

Drexel University

Siddharth Vij

University of Georgia Terry College of Business

Date Written: August 12, 2021


We study how personal experiences of federal regulators affect their decision-making process and shape market outcomes. Using novel employee-level data from the Small Business Administration, we focus on the perception of risk among SBA employees and its effect on the ability of small businesses to obtain access to finance. We identify SBA employees who relocate across offices, and show that defaults on SBA loans in their previous locations reduce SBA loans in their current location. The effect is independent of local economic conditions and unrelated to the informational content of the non-local defaults. Combined, the results indicate that SBA employees rely on their personal experiences to mechanically, as opposed to rationally, update their perception of default risk. The credit crunch caused by risk perceptions reduces the number of jobs supported by the SBA, and the adverse effects are concentrated among borrowers without prior connection to the local SBA office. Investigating the channels, we find that heightened risk perception incentivizes local SBA offices to limit outreach to new borrowers, closely monitor lenders, and cautiously review guarantee applications. Overall, our results are the first to identify a behavioral bias within the state bureaucracy, which affects the exercise of regulatory powers and creates a significant friction in credit markets.

Keywords: small business lending, default risk, risk salience, government guarantees

JEL Classification: D02, D73, G28, G41

Suggested Citation

Kalmenovitz, Joseph and Vij, Siddharth, Regulatory Risk Perception and Small Business Lending (August 12, 2021). Available at SSRN: or

Joseph Kalmenovitz (Contact Author)

Drexel University ( email )

Philadelphia, PA 19104
United States


Siddharth Vij

University of Georgia Terry College of Business ( email )

620 S. Lumpkin Street
Amos Hall, B324
Athens, GA 30602
United States

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