Do Programs Mandating Small Business Lending Disincentivize Growth? Evidence from a Policy Experiment

Exploiting discontinuities in program eligibility, we show that mandates on banks to lend to small firms inhibit firm growth. Newly eligible firms near the upper threshold for treatment exhibit significant real-side slowdown in investment, sales, and a nonaccounting measure, power consumption. The effects are more pronounced for more constrained firms and those borrowing from banks more distant from their lending targets. Establishment level data show similar program-induced distortions in firm size. Our results suggest that financial constraints are important: firms give up growth to retain credit access. However, relief through targeted lending programs can alter growth trajectories by pushing target firms to remain small so they retain financing eligibility or so banks can meet mandated lending targets.