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Credit market failure intervention: Do government sponsored small business credit programs enrich poorer areas?

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Abstract

Using local market employment rates as our measure of economic performance, we find a positive and significant correlation between the average annual level of employment in a local market and the level of SBA guaranteed lending in that local market. Furthermore, the intensity of this correlation is much larger in low-income markets. Indeed, our results suggest that this correlation is positive and significant only in low-income markets. This result has important implications for public policy in general and SBA guaranteed lending in particular.

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Notes

  1. These numbers do not include credit card balances outstanding at small firms.

  2. This is because each loan made would reflect a random draw from the pool of borrowers. If the bank made a large number of small loans to borrowers in the pool then the bank’s loan portfolio would have the same risk and return characteristics of the pool of borrowers.

  3. The act that created the SBA is Public Law 163. For more on the Reconstruction Finance Corporation see Todd (1992).

  4. Beginning in fiscal year 2005, the subsidy from the U.S. Government to help pay for the guaranty was eliminated. The fees charged to 7(a) borrowers and lenders [supposedly] cover the entire costs of the guaranty. The SBA estimates that that this new fee system will save U.S. Taxpayers over $100 million annually.

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Acknowledgements

We thank Zoltan Acz, David Audretsch, James Barth, Timothy Bates, Alicia Robb, Mark Stater, other participants at the Entrepreneurship in Low- and Moderate-Income Communities conference co-sponsored by the Federal Reserve Bank of Kansas City and the Ewing Marion Kauffman Foundation, and two anonymous referees for many helpful comments. We offer a special thank you to Robert Strom who recommended and encouraged this research project. We also thank the Small Business Administration for providing us with the SBA loan-guarantee data and Pat Higgins for outstanding research support. And, financial support by the E. M. Kauffman Foundation is gratefully acknowledged by W.E. Jackson III.

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Authors and Affiliations

  1. Research Department, Federal Reserve Bank of Cleveland, PO Box 6387, Cleveland, OH, 44101-1387, USA

    Ben R. Craig & James B. Thomson

  2. Culverhouse College of Commerce, The University of Alabama, Box 870225, Tuscaloosa, AL, 35487-0225, USA

    William E. Jackson III

Authors
  1. Ben R. Craig
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  2. William E. Jackson III
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  3. James B. Thomson
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Correspondence to William E. Jackson III.

Appendix

Appendix

Appendix A Characteristics of Loans Issued under the SBA 7(a) and 504 Loan Guarantee Programs

Table 4 Average SBA loan $
Full size table
Table 5 Total SBA loans ($000)
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Table 6 Total number of SBA loans
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Craig, B.R., Jackson, W.E. & Thomson, J.B. Credit market failure intervention: Do government sponsored small business credit programs enrich poorer areas?. Small Bus Econ 30, 345–360 (2008). https://doi.org/10.1007/s11187-007-9050-5

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