The Effects of Small-Firm Credit Guarantees during Recessions (with Su Wang)
Small-firm credit guarantees are popular policy responses to crises, but evidence of their real effects is sparse. We estimate the impact of UK guarantees introduced during the Great Recession on several small-firm outcomes by exploiting unexpected firm-size eligibility restrictions. Eligibility leads to higher debt, profits, productivity and employment, particularly for firms with high-skill workforces. Instead, no effects are apparent in debt-repayment, survival, non-debt financing, and fixed-assets investment. The evidence suggests that the guarantees relaxed credit rationing for eligible firms during the crisis, which enabled them to retain and hire productive employees that cannot be pledged as collateral for market loans.