Regional favoritism in access to credit : just believe it
Osei-Tutu, Francis; Weill, Laurent (21.03.2023)
Numero
1/2023Julkaisija
Bank of Finland
2023
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi-fe2023032132677Tiivistelmä
ABSTRACT
We examine the effect of regional favoritism on the access of firms to credit. Using firm-level data on a large sample of 29,000 firms covering 47 countries, we investigate the hypothesis that firms in the birth regions of national political leaders have better access to credit. Our evidence suggests that firms located in birth regions of political leaders are less likely to be credit constrained. The effect takes place through the demand channel: firms in leader regions face fewer hurdles in applying for loans. We find no evidence, however, of preferential lending from banks to firms in leader regions. Thus, regional favoritism affects access to credit through differences in perceptions of firm managers, not deliberate changes in the allocation of resources by political leaders.
We examine the effect of regional favoritism on the access of firms to credit. Using firm-level data on a large sample of 29,000 firms covering 47 countries, we investigate the hypothesis that firms in the birth regions of national political leaders have better access to credit. Our evidence suggests that firms located in birth regions of political leaders are less likely to be credit constrained. The effect takes place through the demand channel: firms in leader regions face fewer hurdles in applying for loans. We find no evidence, however, of preferential lending from banks to firms in leader regions. Thus, regional favoritism affects access to credit through differences in perceptions of firm managers, not deliberate changes in the allocation of resources by political leaders.
Julkaisuhuomautus
NON-TECHNICAL SUMMARY
FOCUS
Regional favoritism is discussed in the large body of literature on political interference in access to credit. To investigate whether regional favoritism actually affects access to credit, we consider the access to credit of firms located in the home region of the political leader against the access to credit to other firms using firm-level data from the World Bank Enterprise Survey. By com bining information on firm financing with data on the birthplaces of national political leaders (at the first-order administrative region level), we construct a sample of 29,456 firms operating in 47 countries.
CONTRIBUTION
Our paper contributes to the literature on regional favoritism in two ways. First, we examine access to credit to investigate an unstudied potential effect of regional favoritism. The analysis complements earlier work on manifestations of regional favoritism through such factors as nighttime light intensity, infrastructure projects, and public transfers. Second, and more importantly, our analysis of access to credit advances the understanding of how regional favoritism affects economic outcomes. Our theoretical and empirical frameworks allow us to analyze the effects of regional favoritism on the allocation of resources by authorities and the perceptions of economic agents. We also contribute to the empirical literature on the determinants of access to credit with an original focus on the key policy issue of regional favoritism.
FINDINGS
We find that regional favoritism affects access to credit. Firms located in the region of the incumbent leader have lower constraints in accessing credit than other firms. This effect manifests in the form of borrower discouragement, i.e. firms located in the region of the national leader are less likely to be discouraged from applying for credit than firms in other regions. In contrast, no impact of regional favoritism is found for loan approvals. Firms in leader regions receive no preferential lending from banks.
FOCUS
Regional favoritism is discussed in the large body of literature on political interference in access to credit. To investigate whether regional favoritism actually affects access to credit, we consider the access to credit of firms located in the home region of the political leader against the access to credit to other firms using firm-level data from the World Bank Enterprise Survey. By com bining information on firm financing with data on the birthplaces of national political leaders (at the first-order administrative region level), we construct a sample of 29,456 firms operating in 47 countries.
CONTRIBUTION
Our paper contributes to the literature on regional favoritism in two ways. First, we examine access to credit to investigate an unstudied potential effect of regional favoritism. The analysis complements earlier work on manifestations of regional favoritism through such factors as nighttime light intensity, infrastructure projects, and public transfers. Second, and more importantly, our analysis of access to credit advances the understanding of how regional favoritism affects economic outcomes. Our theoretical and empirical frameworks allow us to analyze the effects of regional favoritism on the allocation of resources by authorities and the perceptions of economic agents. We also contribute to the empirical literature on the determinants of access to credit with an original focus on the key policy issue of regional favoritism.
FINDINGS
We find that regional favoritism affects access to credit. Firms located in the region of the incumbent leader have lower constraints in accessing credit than other firms. This effect manifests in the form of borrower discouragement, i.e. firms located in the region of the national leader are less likely to be discouraged from applying for credit than firms in other regions. In contrast, no impact of regional favoritism is found for loan approvals. Firms in leader regions receive no preferential lending from banks.