State Dependence in Access to Credit

We present a simple theory and an empirical test for state dependence in firm access to credit. We estimate a first-order Markov model of credit restriction with sample selection that makes it possible to estimate state dependence in the presence of feedback effects and observed and unobserved heterogeneity. The results, based on a representative sample of Italian firms, show that state dependence in access to credit is a statistical and economically significant: experiencing a credit restriction in the past has a negative impact on the outcome of the current loan application and the decision to apply for a new loan.