Do Programs Mandating Small Business Lending Disincentivize Growth? Evidence From A Policy Experiment
Author(s) Gursharan Bhue, Nagpurnanand Prabhala, Prasanna Tantri


Exploiting discontinuities in program eligibility, we show that small-fi rm lending mandates inhibit fi rm growth. Newly eligible fi rms near the upper threshold for treatment slow investment, sales, and a non-accounting measure, power consumption. The eff ects are more pronounced for more constrained fi rms and those borrowing from banks away from their lending targets. Establishment level data show similar program-induced distortions in firm size. Our results suggest that fi nancial constraints matter: firms give up growth to retain credit access. However, lending mandates alter growth trajectories by pushing target firms to remain small to retain financing eligibility or so banks can meet statutory targets.

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