Credit Supply & Entrepreneurship in Low-Income Regions

Mehran Ebrahimian, Finance, The Wharton School, and Seyed Mohammad Mansouri, Columbia Business School

Abstract: Bank credit impacts entrepreneurship, just in low-income regions. By using comprehensive data on U.S. small business bank lending and by using a novel methodology for separating bank-supply shock from local-demand shock in presence of heterogeneous bank-county relationship, we document that while there is not a significant effect in top income quartile counties, in bottom income quartile credit supply shock boosts employment and earning of young firms. The impact is long-lasting; it is not evident in old firms and it is not a redistribution of labor force from old to new-born firms. It is even larger after controlling on education level of the county as a proxy for stock of human capital; and resonates more in external-finance-dependent industries. Finally, by constructing a measure of shock to credit market competition we show that entrepreneurship in low-income areas is more sensitive to an exogenous shock to bank competition in the region.