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

  • Ben R. Craig
  • William E. Jackson
  • James B. Thomson
Part of the The Milken Institute Series on Financial Innovation and Economic Growth book series (MILK, volume 7)


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. 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. 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.


Economic Performance Small Business Business Loan Lending Relationship Loan Guarantee 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Bergstrtöm, F. (2000). Capital Subsidies and the Performance of Firms,” Small Business Economics, 14(3), 183–193.CrossRefGoogle Scholar
  2. Berger, A.N., W.S. Frame, and N. Miller. (2005). “Credit Scoring and the Availability, Price, and Risk of Small-Business Credit,” Journal of Money, Credit, and Banking, 37, 191–222.CrossRefGoogle Scholar
  3. Berger, Allen N., and W. Scott Frame. (2007). “Small-Business Credit Scoring and Credit Availability,” Journal of Small Business Management, 45(1), 5–22.CrossRefGoogle Scholar
  4. Berger, A.N., and G.F. Udell. (1995). “Relationship Lending and Lines of Credit in Small-Firm Finance,” Journal of Business, 68(3), 351–381.CrossRefGoogle Scholar
  5. Calem, P.S., and G.A. Carlino. (1991). “The Concentration/Conduct Relationship in Bank Deposit Markets,” Review of Economics and Statistics, 73, 268–276.CrossRefGoogle Scholar
  6. Cowling, M., and P. Mitchell. (2003). “Is the Small-Firms Loan Guarantee Scheme Hazardous for Banks or Helpful to Small Business?”, Small Business Economics, 21, 63–71.CrossRefGoogle Scholar
  7. Craig, B.R., W.E. Jackson III, and J.B. Thomson. (2004). “Are SBA Loan Guarantees Desirable?”, Economic Commentary, Federal Reserve Bank of Cleveland, 15 September.Google Scholar
  8. Craig, B.R., W.E. Jackson III, J.B. Thomson. (2005). “The Role of Relationships in Small-Business Lending,” Economic Commentary, Federal Reserve Bank of Cleveland, 15 October.Google Scholar
  9. Craig, B.R., W.E. Jackson III, and J.B. Thomson. (2007a). “SBA-Loan Guarantees and Local Economic Growth,” Journal of Small Business Management, 45, 116–132.CrossRefGoogle Scholar
  10. Craig, B.R., W.E. Jackson III, and J.B. Thomson. (2007b). “Credit Market Failure Intervention: Do Government-Sponsored Small-Business Credit Programs Enrich Poorer Areas?” Small Business Economics (forthcoming), DOI 10.1007/s11187–007–9050–5.Google Scholar
  11. Craig, B.R., and J.B. Thomson. (2003). “Federal Home Loan Bank Lending to Community Banks: Are Targeted Subsidies Desirable?” Journal of Financial Services Research 23(1), 5–28.CrossRefGoogle Scholar
  12. Frame, W.S., A. Srinivasan, and L. Woosley (2001). “The Effect of Credit Scoring on Small Business Lending,” Journal of Money, Credit, and Banking, 33, 813–825.CrossRefGoogle Scholar
  13. Frame, W.S., M. Padhi, and L. Woolsey. (2004). “The Effect of Credit Scoring on Small Business Lending in Low- and Moderate Income Areas,” Financial Review, 39, 35–54.CrossRefGoogle Scholar
  14. E.M. Kauffman Foundation. (2004a). Kauffman Thought book 2004, Kauffman Foundation, Kansas City, Missouri.Google Scholar
  15. Guiso, Luigi, Sapienza, Paola, and Zingales, Luigi, (2004). “Does Local Financial Development Matter?” Quarterly Journal of Economics, 119, 929–969.Google Scholar
  16. Jackson, W.E. III. (1992a). “The Price-Concentration Relationship in Banking: A Comment,” Review of Economics and Statistics, 74, 373–376.CrossRefGoogle Scholar
  17. Jayartne, J., and P.E. Strahan (1996). “The Finance-Growth Nexus: Evidence From Bank Branch Deregulation,” Quarterly Journal of Economics, 111(3), 639–670.CrossRefGoogle Scholar
  18. Kane, E.J., and B.G. Malkiel (1965). “Bank Portfolio Allocation, Deposit Variability, and the Availability Doctrine,” Quarterly Journal of Economics, 79(1), 113–134.Google Scholar
  19. Kane, E.J. (1977). “Good Intentions and Unintended Evil: The Case Against Selective Credit Allocation,” Journal of Money, Credit and Banking, 9(1), 55–69.CrossRefGoogle Scholar
  20. King, R.G., and R. Levine (1993a). “Finance and Growth: Schumpeter Might be Right,” Quarterly Journal of Economics, 108(3): 717–737.CrossRefGoogle Scholar
  21. King, R.G., and R. Levine (1993b). “Finance, Entrepreneurship, and Growth: Theory and Evidence,” Journal of Monetary Economics, 32(3), 513–542.CrossRefGoogle Scholar
  22. Myers, S.C., and N.S. Majluf (1984). “Corporate Financing and Investment Decisions when Firms have Information that Investors do not have,” Journal of Financial Economics, 13, 187–221.CrossRefGoogle Scholar
  23. Petersen, Mitchell, A., and R.G. Rajan. (1994). “The Benefits of Lending Relationships: Evidence from Small-Business Data,” Journal of Finance, 49(1), 3–37.CrossRefGoogle Scholar
  24. Petersen, M.A., and R.G. Rajan. (1995). “The Effect of Credit Market Competition on Lending Relationships,” Quarterly Journal of Economics, 110(2), 407–443.CrossRefGoogle Scholar
  25. Rajan, R.G. and L. Zingales. (1998). “Financial Dependence and Growth,” American Economic Review, 88(3), 559–586.Google Scholar
  26. Robinson, J. (1952). The Generalization of the General Theory: The Rate of Interest and Other Essays. Macmillan Press, London.Google Scholar
  27. SBA. (2005). Small and Micro Business Lending for 2003–2004, U.S. Small Business Administration, Office of Advocacy, November 2005, Report No. 266.Google Scholar
  28. SBA. (2006a). Web page for Small Business Administration, September 18, 2006. Google Scholar
  29. Schumpeter, J. (1911). A Theory of Economic Development. Harvard University Press, Cambridge, Massachusetts.Google Scholar
  30. Shaffer, S. (1994). “ Bank Competition in Concentrated Markets,” Business Review,Federal Reserve Bank of Philadelphia, 3–16.Google Scholar
  31. Shaffer, S., (2004). “Patterns of Competition in Banking,” Journal of Economics and Business, 56, 287–313.CrossRefGoogle Scholar
  32. Stein, Jeremy C., 2002, Information Production and Capital Allocation: Decentralized versus Hierarchical Firms Journal of Finance, 57(5), 1891–1921.Google Scholar
  33. Stiglitz, J.E., and A. Weiss. (1981). “Credit Rationing in Markets with Imperfect Information,” American Economic Review, 71(3), 393–410.Google Scholar
  34. Todd, W.F. (1992). “History of and Rationales for the Reconstruction Finance Corporation, Federal Reserve Bank of Cleveland,” Economic Review (4th Quarter), 22–35.Google Scholar
  35. Wennekers, S., and R. Thurik. (1999). “Linking Entrepreneurship and Economic Growth,” Small Business Economics, 13(1), 27–55.CrossRefGoogle Scholar

Copyright information

© Milken Institute 2008

Authors and Affiliations

  • Ben R. Craig
    • 1
  • William E. Jackson
  • James B. Thomson
  1. 1.Federal Reserve Bank of ClevelandClevelandUSA

Personalised recommendations