The Role of Regulation and Competition in Credit Allocation : Evidence from Small Business Lending

Do policies that promote credit access have an impact on targeted borrowers? To address this question, we develop a theoretical model of information production, regulation and bank competition and test its predictions using the Community Reinvestment Act's small businesses lending program. The analysis reveals that, on average, regulation-induced surge of loans leads to an improvement in the credit score of small businesses. However, the effect vanishes in markets with high demand-adjusted bank competition, due to weaker bank incentives for information production. In order to improve credit allocation across all local markets, interventions should also enact policies that lower information costs