IDEAS home Printed from https://ideas.repec.org/a/eee/regeco/v98y2023ics0166046222000758.html
   My bibliography  Save this article

Impact of the Community Reinvestment Act on small business employment in lower income neighborhoods

Author

Listed:
  • Kim, Mee Jung

Abstract

This study examines the impact of the Community Reinvestment Act (CRA) on small business growth in low- and moderate-income (LMI) neighborhoods in the United States. Using rich firm-level panel data on every U.S. employer, I exploit the sharp threshold cutoff for CRA eligibility and changes in CRA eligibility over time to estimate the effects on business employment. I find that the firms located in the CRA eligible areas increase employment by about 0.8 percent compared to firms in CRA ineligible areas, and the effects are larger for young firms and firms in minority neighborhoods, which potentially face higher credit access barriers, increasing employment by about 1.5 and 1.9 percent, respectively. I also find that increases in lending in the CRA areas are related to the number of banks, implying that the channel offers greater access to finance.

Suggested Citation

  • Kim, Mee Jung, 2023. "Impact of the Community Reinvestment Act on small business employment in lower income neighborhoods," Regional Science and Urban Economics, Elsevier, vol. 98(C).
    • Handle: RePEc:eee:regeco:v:98:y:2023:i:c:s0166046222000758
    DOI: 10.1016/j.regsciurbeco.2022.103837
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0166046222000758
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.regsciurbeco.2022.103837?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Ryan Banerjee, 2014. "SMEs, financial constraints and growth," BIS Working Papers 475, Bank for International Settlements.
    2. Lalive, Rafael, 2008. "How do extended benefits affect unemployment duration A regression discontinuity approach," Journal of Econometrics, Elsevier, vol. 142(2), pages 785-806, February.
    3. Brown, J David & Earle, John S & Lup, Dana, 2005. "What Makes Small Firms Grow? Finance, Human Capital, Technical Assistance, and the Business Environment in Romania," Economic Development and Cultural Change, University of Chicago Press, vol. 54(1), pages 33-70, October.
    4. Sumit Agarwal & Efraim Benmelech & Nittai Bergman & Amit Seru, 2012. "Did the Community Reinvestment Act (CRA) Lead to Risky Lending?," NBER Working Papers 18609, National Bureau of Economic Research, Inc.
    5. David S. Lee & Thomas Lemieux, 2010. "Regression Discontinuity Designs in Economics," Journal of Economic Literature, American Economic Association, vol. 48(2), pages 281-355, June.
    6. Robert B. Avery & Kenneth P. Brevoort, 2015. "The Subprime Crisis: Is Government Housing Policy to Blame?," The Review of Economics and Statistics, MIT Press, vol. 97(2), pages 352-363, May.
    7. Avery, Robert B. & Bostic, Raphael W. & Samolyk, Katherine A., 1998. "The role of personal wealth in small business finance," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 1019-1061, August.
    8. Blandina Oliveira & Adelino Fortunato, 2006. "Firm Growth and Liquidity Constraints: A Dynamic Analysis," Small Business Economics, Springer, vol. 27(2), pages 139-156, October.
    9. Dan Cao & Erick Sager & Henry Hyatt & Toshihiko Mukoyama, 2019. "Firm Growth through New Establishments," 2019 Meeting Papers 1484, Society for Economic Dynamics.
    10. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934, Elsevier.
    11. Stephanie Riegg Cellini & Fernando Ferreira & Jesse Rothstein, 2010. "The Value of School Facility Investments: Evidence from a Dynamic Regression Discontinuity Design," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(1), pages 215-261.
    12. Elizabeth Asiedu & James A. Freeman & Akwasi Nti-Addae, 2012. "Access to Credit by Small Businesses: How Relevant Are Race, Ethnicity, and Gender?," American Economic Review, American Economic Association, vol. 102(3), pages 532-537, May.
    13. Pettersson-Lidbom, Per, 2012. "Does the size of the legislature affect the size of government? Evidence from two natural experiments," Journal of Public Economics, Elsevier, vol. 96(3), pages 269-278.
    14. David G. Blanchflower & Phillip B. Levine & David J. Zimmerman, 2003. "Discrimination in the Small-Business Credit Market," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 930-943, November.
    15. Kim, Mee Jung & Lee, Kyung Min & Earle, John S., 2021. "Does the Community Reinvestment Act increase lending to small businesses in lower income neighborhoods?," Economics Letters, Elsevier, vol. 209(C).
    16. Michael Greenstone & Alexandre Mas & Hoai-Luu Nguyen, 2020. "Do Credit Market Shocks Affect the Real Economy? Quasi-experimental Evidence from the Great Recession and "Normal" Economic Times," American Economic Journal: Economic Policy, American Economic Association, vol. 12(1), pages 200-225, February.
    17. Timothy E. Dore & Traci L. Mach, 2018. "Recent Trends in Small Business Lending and the Community Reinvestment Act," FEDS Notes 2018-01-02, Board of Governors of the Federal Reserve System (U.S.).
    18. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769.
    19. Luís M B Cabral & José Mata, 2003. "On the Evolution of the Firm Size Distribution: Facts and Theory," American Economic Review, American Economic Association, vol. 93(4), pages 1075-1090, September.
    20. Gian Luca Clementi & Hugo A. Hopenhayn, 2006. "A Theory of Financing Constraints and Firm Dynamics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(1), pages 229-265.
    21. Marco Leonardi & Giovanni Pica, 2013. "Who Pays for it? The Heterogeneous Wage Effects of Employment Protection Legislation," Economic Journal, Royal Economic Society, vol. 123(12), pages 1236-1278, December.
    22. Kim, Mee Jung & Lee, Kyung Min & Earle, John S., 2021. "Does the Community Reinvestment Act Increase Small Business Lending in Lower Income Neighborhoods?," IZA Discussion Papers 14681, Institute of Labor Economics (IZA).
    23. Anil Rupasingha & Kyungsoon Wang, 2017. "Access to capital and small business growth: evidence from CRA loans data," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 59(1), pages 15-41, July.
    24. Veronica Grembi & Tommaso Nannicini & Ugo Troiano, 2016. "Do Fiscal Rules Matter?," American Economic Journal: Applied Economics, American Economic Association, vol. 8(3), pages 1-30, July.
    25. Matias D. Cattaneo & Nicolas Idrobo & Rocio Titiunik, 2019. "A Practical Introduction to Regression Discontinuity Designs: Foundations," Papers 1911.09511, arXiv.org.
    26. Robert B. Avery & Paul S. Calem & Glenn B. Canner, 2003. "The effects of the Community Reinvestment Act on local communities," Proceedings 878, Federal Reserve Bank of Chicago.
    27. Claire Lelarge & David Sraer & David Thesmar, 2010. "Entrepreneurship and Credit Constraints: Evidence from a French Loan Guarantee Program," NBER Chapters, in: International Differences in Entrepreneurship, pages 243-273, National Bureau of Economic Research, Inc.
    28. Ron S Jarmin & Javier Miranda, 2002. "The Longitudinal Business Database," Working Papers 02-17, Center for Economic Studies, U.S. Census Bureau.
    29. Lee, Hyojung & Bostic, Raphael W., 2020. "Bank adaptation to neighborhood change: Mortgage lending and the Community Reinvestment Act," Journal of Urban Economics, Elsevier, vol. 116(C).
    30. Gamberoni, Elisa & Gradeva, Katerina & Weber, Sebastian, 2016. "Firm responses to employment subsidies: a regression discontinuity approach to the 2012 Spanish labour market reform," Working Paper Series 1970, European Central Bank.
    31. Beck, Thorsten & Demirguc-Kunt, Asli, 2006. "Small and medium-size enterprises: Access to finance as a growth constraint," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 2931-2943, November.
    32. Robert Avery & Raphael Bostic & Glenn Canner, 2005. "Assessing the necessity and efficiency of the community reinvestment act," Housing Policy Debate, Taylor & Francis Journals, vol. 16(1), pages 143-172.
    33. Nada Kobeissi, 2009. "Impact of the Community Reinvestment Act on New Business Start‐Ups and Economic Growth in Local Markets," Journal of Small Business Management, Taylor & Francis Journals, vol. 47(4), pages 489-513, October.
    34. Blanchard, Lloyd & Zhao, Bo & Yinger, John, 2008. "Do lenders discriminate against minority and woman entrepreneurs?," Journal of Urban Economics, Elsevier, vol. 63(2), pages 467-497, March.
    35. J. David Brown & John S. Earle, 2017. "Finance and Growth at the Firm Level: Evidence from SBA Loans," Journal of Finance, American Finance Association, vol. 72(3), pages 1039-1080, June.
    36. Timothy Bates & Alicia Robb, 2015. "Has the Community Reinvestment Act increased loan availability among small businesses operating in minority neighbourhoods?," Urban Studies, Urban Studies Journal Limited, vol. 52(9), pages 1702-1721, July.
    37. Neil Bhutta, 2011. "The Community Reinvestment Act and Mortgage Lending to Lower Income Borrowers and Neighborhoods," Journal of Law and Economics, University of Chicago Press, vol. 54(4), pages 953-983.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Panagiotis Avramidis & George Pennacchi & Konstantinos Serfes & Kejia Wu, 2022. "The Role of Regulation and Bank Competition in Small Firm Financing: Evidence from the Community Reinvestment Act," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(8), pages 2301-2340, December.
    2. Kim, Mee Jung & Lee, Kyung Min & Brown, J. David & Earle, John S., 2021. "Black Entrepreneurs, Job Creation, and Financial Constraints," IZA Discussion Papers 14403, Institute of Labor Economics (IZA).
    3. Mauricio Villamizar‐Villegas & Freddy A. Pinzon‐Puerto & Maria Alejandra Ruiz‐Sanchez, 2022. "A comprehensive history of regression discontinuity designs: An empirical survey of the last 60 years," Journal of Economic Surveys, Wiley Blackwell, vol. 36(4), pages 1130-1178, September.
    4. Kim, Mee Jung & Lee, Kyung Min & Earle, John S., 2021. "Does the Community Reinvestment Act increase lending to small businesses in lower income neighborhoods?," Economics Letters, Elsevier, vol. 209(C).
    5. Kenneth P. Brevoort, 2022. "Does Giving CRA Credit for Loan Purchases Increase Mortgage Credit in Low-to-Moderate Income Communities?," Finance and Economics Discussion Series 2022-047, Board of Governors of the Federal Reserve System (U.S.).
    6. Lee, Hyojung & Bostic, Raphael W., 2020. "Bank adaptation to neighborhood change: Mortgage lending and the Community Reinvestment Act," Journal of Urban Economics, Elsevier, vol. 116(C).
    7. Olsen, Edgar O. & Zabel, Jeffrey E., 2015. "US Housing Policy," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 887-986, Elsevier.
    8. J David Brown & John S Earle & Mee Jung Kim & Kyung Min Lee, 2019. "Start-ups, job creation, and founder characteristics," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 28(6), pages 1637-1672.
    9. Kim, Mee Jung & Lee, Kyung Min & Earle, John S., 2021. "Does the Community Reinvestment Act Increase Small Business Lending in Lower Income Neighborhoods?," IZA Discussion Papers 14681, Institute of Labor Economics (IZA).
    10. Segarra Blasco, Agustí, 1958- & Teruel, Mercedes, 2010. "Are small firms more sensitive to financial variables?," Working Papers 2072/151623, Universitat Rovira i Virgili, Department of Economics.
    11. Joshua D Gottlieb & Richard R Townsend & Ting Xu, 2022. "Does Career Risk Deter Potential Entrepreneurs?," The Review of Financial Studies, Society for Financial Studies, vol. 35(9), pages 3973-4015.
    12. Pham, Tho & Talavera, Oleksandr, 2018. "Discrimination, Social Capital, and Financial Constraints: The Case of Viet Nam," World Development, Elsevier, vol. 102(C), pages 228-242.
    13. Brett Barkley & Mark Schweitzer, 2023. "Credit Availability for Minority Business Owners in an Evolving Credit Environment," Economic Development Quarterly, , vol. 37(3), pages 230-242, August.
    14. Bergolo, M. & Cruces, G., 2021. "The anatomy of behavioral responses to social assistance when informal employment is high," Journal of Public Economics, Elsevier, vol. 193(C).
    15. Stephane Verani, 2018. "Aggregate Consequences of Dynamic Credit Relationships," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 44-67, July.
    16. Agata Maida & Daniela Sonedda, 2019. "Getting out of the starting gate on the right foot: employment effects of investment in human capital," LABORatorio R. Revelli Working Papers Series 164, LABORatorio R. Revelli, Centre for Employment Studies.
    17. Lei Ding & Leonard I. Nakamura, 2017. "“Don't Know What You Got Till It’s Gone” — The Effects of the Community Reinvestment Act (CRA) on Mortgage Lending in the Philadelphia Market," Working Papers 17-15, Federal Reserve Bank of Philadelphia.
    18. Daniel Ringo, 2023. "Mortgage Lending, Default, and the Community Reinvestment Act," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(1), pages 77-102, February.
    19. Laura Blattner & Scott Nelson, 2021. "How Costly is Noise? Data and Disparities in Consumer Credit," Papers 2105.07554, arXiv.org.
    20. René Böheim & Sarah Gust, 2022. "The Austrian Pay Transparency Law and the Gender Wage Gap," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 23(02), pages 25-28, March.

    More about this item

    Keywords

    Access to finance; Small business employment; Community Reinvestment Act; Lower income neighborhood;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R58 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Regional Development Planning and Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:regeco:v:98:y:2023:i:c:s0166046222000758. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/regec .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.