Do Programs Mandating Small Business Lending Disincentivize Growth? Evidence from a Policy Experiment

Abstract

Exploiting discontinuities in program eligibility, we show that small-firm lending mandates inhibit firm growth. Firms newly qualified under lending mandates near the upper threshold for treatment have lower growth in investment, sales, and a nonaccounting measure, power consumption. The effects are more pronounced for more constrained firms and those borrowing from banks facing shortfalls in meeting lending targets. Establishment level data show similar program-induced distortions in firm size. Our results suggest that financial constraints matter: firms give up growth to retain credit access. However, solving small firm constraints through lending mandates on banks could counterintuitively slow growth so that target firms remain small and banks find it easier to meet statutory targets. Co-Authors: Gursharan Bhue, University of Chicago and Prasanna Tantri, Indian School of Business