- Title
- Market Power in Small Business Lending: A Two-Dimensional Bunching Approach
- Author(s)
- Natalie Cox Natalie Cox (Princeton University)
- Ernest Liu Ernest Liu (Princeton University)
- Daniel Morrison Daniel Morrison (Princeton University)
- 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.
- Creation Date
- 2021-08
- Section URL ID
- Paper Number
- 2021-27
- URL
- https://scholar.princeton.edu/sites/default/files/ernestliu/files/augdraft.pdf
- File Function
- Jel
- H81, E43
- Keyword(s)
- government, small business, loans, interest rates
- Suppress
- false
- Series
- 13