Small Firm Credit Market Discrimina - tion , SBA - Guaranteed Lending , and Local Market Economic Performance

Working papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views stated herein are those of the authors and are not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. We empirically test whether SBA-guaranteed lending has a greater impact on economic performance in markets with a high percentage of potential minority small businesses. This hypothesis is predicated on priors related to three overlapping assumptions. These three assumptions are: (1) The classic type of credit rationing developed in the seminal paper by Stiglitz and Weiss (1981) is more likely to occur in markets with a higher per capita percentage of minority small businesses because such markets are more likely to have more severe information asymmetry problems, (2) SBA-guaranteed lending is likely to reduce these credit rationing problems—thus improving the level of development of the local financial market, and (3) increased local financial market development helps to lubricate the wheels of economic performance (Rajan and Zingales, 1998). Using local labor market employment rates as our measure of economic performance, we find evidence consistent with this proposition. In particular, we find a positive and significant impact on the average annual level of employment in a local market of SBA-guaranteed lending in that local market. This impact is 200 percent larger in markets with a high percentage of potential minority small businesses. This result has important implications for public policy in general and SBA-guaranteed lending in particular. 1. Introduction Minority entrepreneurs report that access to adequate capital is a major problem much more often than their majority counterparts. For example, in a recent study, Blanchflower, Levine, and Zimmerman (2003) report that Black small business owners are three times as likely as White small business owners to list access to sufficient capital at reasonable rates as a major problem faced by their firm. This reported disparity in access to capital between minority and majority small business owners may stem from one or two possible sources [or some combination of these sources]. Either minority small business owners do not offer to capital providers as many positive net present value (NPV) projects, on average, as majority small business owners. Or, minority small …