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Market Power in Small Business Lending: A Two-Dimensional Bunching Approach

Author

Listed:
  • Natalie Cox

    (Princeton University)

  • Ernest Liu

    (Princeton University)

  • 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.

Suggested Citation

  • Natalie Cox & Ernest Liu & Daniel Morrison, 2021. "Market Power in Small Business Lending: A Two-Dimensional Bunching Approach," Working Papers 2021-27, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2021-27
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    government; small business; loans; interest rates;
    All these keywords.

    JEL classification:

    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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