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Democratizing Entry: Banking Deregulations, Financing Constraints, and Entrepreneurship

We study how US branch-banking deregulations affected the entry and exit of firms in the non-financial sector using establishment-level data from the US Census Bureau’s Longitudinal Business Database. The comprehensive micro-data allow us to study how the entry rate, the distribution of entry sizes, and survival rates for firms responded to changes in banking competition. We also distinguish the relative effect of the policy reforms on the entry of startups versus facility expansions by existing firms. We find that the deregulations reduced financing constraints, particularly among small startups, and improved ex ante allocative efficiency across the entire firm-size distribution. However, the US deregulations also led to a dramatic increase in “churning” at the lower end of the size distribution, where new startups fail within the first three years following entry. This churning emphasizes a new mechanism through which financial sector reforms impact product markets. It is not exclusively better ex ante allocation of capital to qualified projects that causes creative destruction; rather banking deregulations can also “democratize” entry by allowing many more startups to be founded. The vast majority of these new entrants fail along the way, but a few survive ex post to displace incumbents.

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File URL: ftp://ftp2.census.gov/ces/wp/2007/CES-WP-07-33.pdf
File Function: First version, 2007
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Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 07-33.

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Length: 41 pages
Date of creation: Dec 2007
Date of revision:
Handle: RePEc:cen:wpaper:07-33
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