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On Government Intervention in the Small-Firm Credit Market and Its Effect on Economic Performance


In this paper we empirically test whether the Small Business Administration’s main guaranteed lending program—the 7(a) program—has a greater impact on economic performance in low income markets than in others. This hypothesis is predicated on our previous research (Craig, Jackson, and Thomson 2007b), where we investigate aggregate SBA guaranteed lending. In that research we found that the overall impact of SBA guaranteed lending on economic performance is significant and positive in low-income markets.

Using local labor market employment rates as our measure of economic performance, we find a quantitatively similar positive impact of SBA 7(a) guaranteed lending. This impact on economic performance is also significantly larger in low-income areas than in other areas. This result suggests that the 7(a) program, which is the largest SBA guaranteed lending program, is also the main contributor to the positive impact of SBA guaranteed lending on local market economic performance.

JEL code: G38, H81, O16.

Keywords: credit rationing, employment rates, small business, credit markets, loan guarantees.


Suggested citation: Craig, Ben R., William E. Jackson, and James B. Thomson, 2007. "On Government Intervention in the Small-Firm Credit Market and Its Effect on Economic Performance," Federal Reserve Bank of Cleveland, Working Paper no. 07-02.

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