Market Power in Small Business Lending: A Two-Dimensional Bunching Approach

Natalie Cox, Ernest Liu and Daniel Morrison
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Natalie Cox: Princeton University
Ernest Liu: Princeton University
Daniel Morrison: Princeton University

Working Papers from Princeton University. Economics Department.

Abstract: Do government-funded guarantees and interest rate caps primarily benefit borrowers or lenders under imperfect competition? We study how bank concentration impacts the effectiveness of these policy interventions in the small business loan market. Using data from the Small Business Administration's (SBA) Express Loan Program, we estimate a tractable model of bank competition with endogenous interest rates, loan size, and take-up. We introduce a novel methodology that exploits loan "bunching" in the two dimensional contract space of loan size and interest rates, utilizing a discontinuity in the SBA's interest rate cap. In concentrated markets, we find that a modest decrease in the cap would increase borrower surplus by up to 1.5%, despite the rationing of some loans. In concentrated markets with a 50% loan guarantee, each government dollar spent raises borrower surplus by $0.64, boosts lender surplus by $0.34, and generates $0.02 of deadweight loss.

Keywords: government; small business; loans; interest rates (search for similar items in EconPapers)
JEL-codes: E43 H81 (search for similar items in EconPapers)
Date: 2021-08
New Economics Papers: this item is included in nep-com, nep-ent, nep-mac and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pri:econom:2021-27

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