Firm Entry Barriers, Growth Constraints, and Job Creation: Theory and Evidence from Brazil
Early Career Research Award
We propose to investigate the importance of financial constraints as a barrier to entry and as a barrier to growth. A model of firm dynamics with liquidity-constrained entrepreneurial choice suggests a novel channel through which easing credit constraints can induce entry of more dynamic startups with greater long-run growth potential than would be unlocked by easing conventional entry barriers. We will test for this growth mechanism by combining new data on credit access with longitudinal employment records for the universe of formal sector firms in Brazil from 1986–2009. Our main identification strategy exploits predetermined variation in interbank lending relationships with the National Development Bank and policy-induced shocks to the national supply of credit for small and medium enterprises (SMEs). Through the use of extraordinarily rich and comprehensive administrative data, our study promises new insights into the importance of financial frictions for SME growth and employment generation.