Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/282360 
Year of Publication: 
2023
Series/Report no.: 
CESifo Working Paper No. 10672
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We explore how financial constraints distort the entry decisions among otherwise productive entrepreneurs and limit growth of promising young firms. A model of liquidity-constrained entrepreneurs suggests that the easing of credit constraints can induce more entry of firms with greater long-run growth potential than the easing of conventional entry barriers would bring about. We explore this growth mechanism using a large-scale program to expand the supply of credit to small and medium enterprises in Brazil. Local credit supply shocks generate greater firm entry but also greater exit with no effect on short-run employment growth in the formal sector. However, credit expansions increase average capability among entering firms, which enter at larger size, survive longer, and grow faster. These firm dynamics are more pronounced in areas with weaker credit markets ex ante and consistent with local bank branches using cheap targeted credit lines to expand lending more broadly. Our findings provide new evidence on the general equilibrium effects of credit supply expansions.
Subjects: 
credit constraints
entry barriers
growth barriers
startups
JEL: 
D21
D22
D92
L25
L26
M13
O12
Document Type: 
Working Paper
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