Credit Supply and Entrepreneurship in Low-Income Regions

We show that bank credit affects entrepreneurship, but only in low-income regions. We use a novel methodology to identify the credit supply shock from the regional demand shock using comprehensive data on small business loans between pairs of banks and counties in the US. While there is no impact in top income quartile counties, we document that a one STD credit supply shock is associated with 1.6 and 1.7 percentage points employment and payroll growth in newborn firms in the bottom income quartile counties. We show that this impact is long-lasting; is only pronounced in newborn firms; is not just a redistribution of labor from established to newborn firms; and does not lead to a reduction in labor productivity. We estimate that a credit redistribution of $100 from counties of above- to below-median income per capita results in $6.5 annual labor earnings in the aggregate