Working Paper: CEPR ID: DP18503
Authors: Samuel Bazzi; Marc Muendler; Raquel de Freitas Oliveira; James E. Rauch
Abstract: We explore how financial constraints distort the entry decisions among otherwise productive entrepreneurs and limit growth of promising young firms. A model of liquidity-constrained entrepreneurs suggests that the easing of credit constraints can induce more entry of firms with greater long-run growth potential than the easing of conventional entry barriers would bring about. We explore this growth mechanism using a large-scale program to expand the supply of credit to small and medium enterprises in Brazil. Local credit supply shocks generate greater firm entry but also greater exit with no effect on short-run employment growth in the formal sector. However, credit expansions increase average capability among entering firms, which enter at larger size, survive longer, and grow faster. These firm dynamics are more pronounced in areas with weaker credit markets ex ante and consistent with local bank branches using cheap targeted credit lines to expand lending more broadly. Our findings provide new evidence on the general equilibrium effects of credit supply expansions.
Keywords: startups; credit constraints; entry barriers; growth barriers
JEL Codes: D21; D22; D92; L25; L26; M13; O12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| local credit supply shocks induced by the Cartão BNDES program (E51) | increase in the entry of new firms (M13) |
| easing of financial constraints (G28) | more capable entrepreneurs enter the market (L26) |
| increase in firm entry (L26) | increase in firm exit (L26) |
| credit expansions (E51) | increase the average capability of entering firms (L25) |
| credit supply shocks (E51) | significant effects on firm dynamics (L25) |
| credit supply shocks (E51) | ambiguous effects on overall employment levels (F66) |