Loan Guarantees and Credit Supply

Journal of Financial Economics, R&R
Coauthors: Natalie Cox and Olivia Kim

The efficiency of federal lending guarantees depends on whether guarantees increase lend- ing supply, or simply act as a subsidy to lenders. We estimate the elasticity of lending supply to loan guarantees by exploiting notches in guarantee rate schedule for loans backed by the Small Business Administration. We find significant bunching on the side of the size threshold that carries a higher loan guarantee, and estimate an elasticity of lending supply to loan guar- antees of approximately 5. We find that the excess mass is greater in years when guarantees are higher, and placebo estimates indicate no bunching in years when the guarantees notch is eliminated.