Working Paper: NBER ID: w28154
Authors: Robert W. Fairlie; Alicia Robb; David T. Robinson
Abstract: We use confidential and restricted-access data from the Kauffman Firm Survey and matched administrative data on credit scores to explore racial disparities in access to capital for new business ventures. The novel results on racial inequality in startup financing indicate that black-owned startups start smaller and stay smaller over the entire first eight years of their existence. Black startups face more difficulty in raising external capital, especially external debt. We find that disparities in credit-worthiness constrain black entreprenuers, but perceptions of treatment by banks also hold them back. Black entrepreneurs apply for loans less often than white entrepreneurs largely because they expect to be denied credit, even when they have a good credit history and in settings where strong local banks favor new business development.
Keywords: Minority-Owned Startups; Access to Capital; Racial Disparities; Entrepreneurship
JEL Codes: J15; J71; L26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Racial differences in access to capital (J79) | Financial capital received by black-owned startups (O16) |
| Lower credit scores among black startups (M13) | Initial funding gap (G23) |
| Racial differences in attitudes toward credit markets and fear of rejection (G51) | Loan application behavior of black entrepreneurs (G51) |
| Credit scores and net worth (G51) | Differences in firm size between black-owned and white-owned businesses (L25) |
| Initial funding size (G31) | Size of later funding injections for black-owned startups (L26) |