Presenta: Jorge Guzmán, Columbia University
Abstract Because the neighborhoods in which people live affect their economic outcomes, researchers and practitioners have sought to understand how to improve neighborhoods. One way of doing so is by stimulating entrepreneurship, because new businesses produce multiple local externalities. We focus on the role of access to credit, and examine whether restricting alternative financial institutions (AFIs) such as payday lenders and auto title lenders has stimulated or undermined entrepreneurship. The impact of such restrictions is unclear, because while AFIs can trap borrowers in cycles of debt they can also help ease liquidity constraints. We first examine the effect of AFIs on neighborhood entrepreneurship quasi-experimentally, by exploiting changes in state-level regulations restricting AFIs. We find that state bans on AFIs result in fewer startups in neighborhoods, suggesting that AFIs may benefit entrepreneurship. However, we then examine how access to conventional banks affects the effect of AFIs, exploiting exogenous shocks that made banking in certain neighborhoods easier, and find that startup rates increase further. Our findings thus suggest that AFIs may help entrepreneurship, but are ultimately weak alternatives to conventional banks. We discuss implications for research on neighborhood inequality, AFIs, and startups.
