« Back to Results

Black Entrepreneurs and Financial Constraints

Paper Session

Friday, Jan. 7, 2022 12:15 PM - 2:15 PM (EST)

Hosted By: American Economic Association
  • Chair: Raphael Bostic, Federal Reserve Bank of Atlanta

Black-Owned Firms, Financial Constraints, and the Firm Size Gap

Mee Jung Kim
,
Sejong University
Kyung Min Lee
,
World Bank
J. David Brown
,
U.S. Census Bureau
John S. Earle
,
George Mason University

Abstract

Black-owned businesses tend to employ fewer workers and to operate with less finance than those owned by Whites. We document these facts using recently available Annual Survey of Entrepreneurs data from the Census Bureau. Controlling for a rich set of firm and entrepreneur characteristics, including motivations for ownership, and employing a regression decomposition as an accounting framework, we find that observed differences in use of finance accounts for about 60 percent of the 11.3 percent racial gap in firm size, measured by number of employees. The racial differences in returns to the financial measures accounts for 103 percent of the gap. Taken together, the results imply that if both the levels of finance and their impacts on firm size were equalized across races, then Black-owned firms would be 18.4 percent larger than their actual size. Thus, equalizing finance alone, while allowing all other factors to vary, would reverse the firm size gap, so that Black-owned firms would be larger than White-owned firms by 7.1 percent.

The 2021 Paycheck Protection Program Reboot: Loan Disbursement to Employer and Nonemployer Businesses in Minority Communities

Robert Fairlie
,
University of California-Santa Cruz
Frank M. Fossen
,
University of Nevada-Reno

Abstract

Was the $278 billion reboot of the $800 billion Paycheck Protection Program (PPP) disbursed equitably to minority communities? This paper provides the first analysis of how PPP funds were disbursed to minority communities in the third and final round of the program, which was specifically targeted to underserved and disadvantaged communities. Using administrative microdata on the universe of PPP loans, we find a strong positive relationship between PPP flows, as measured by the number of loans per employer business or loan amounts per employee, and the minority share of the population or businesses in the third round. In contrast, the relationship was negative in the first round of 2020 and less positive in the second round of 2020. We find a stronger positive relationship between minority share and loan numbers or amounts to employer businesses for first draw loans than second draw loans in 2021. The patterns are similar for loan numbers and amounts to nonemployer businesses but with a similarly strong positive relationship with minority share for both first draw and second draw loans. In comparison, in 2020 there was a negative relationship with minority share in the first round and a much weaker positive relationship in the second round. The restarted PPP program that ran from January to May 2021 appears to have been disbursed to minority communities as intended.

Barriers to Black Entrepreneurship: Implications for Welfare and Aggregate Output over Time

Pedro Bento
,
Texas A&M University
Sunju Hwang
,
Texas A&M University

Abstract

The number of black-owned businesses in the U.S. has increased dramatically since the 1980s, even compared to the number of non-black-owned businesses and the rise in black labor-market participation. In 1982 less than 4 percent of black labor-market participants owned businesses, compared to over 14 percent of other participants. By 2012 more than 16 percent of black participants owned businesses while the analogous rate for non-black participants increased to only 19 percent. Combined with other evidence, this suggests black entrepreneurs have faced significant barriers to starting and running businesses and these barriers have declined over time. We examine the impact of these trends on aggregate output and welfare. Interpreted through a model of entrepreneurship, declining barriers from 1982 to 2012 led to a permanent 2 percent increase in (consumption-equivalent) black welfare, a 0.7 percent increase in output per worker (a small fraction of the observed 70 percent increase), and a 0.7 percent decrease in the welfare of other labor-market participants. These impacts are in addition to any gains from declining labor-market barriers.

Using Technology to Tackle Discrimination in Lending

Rachel M.B. Atkins
,
New York University
Lisa Cook
,
Michigan State University and NBER
Robert Seamans
,
New York University

Abstract

We assess the role of FinTech firms in loans made through the Paycheck Protection Program (PPP). The PPP program, created by the U.S. government as a response to the Covid-19 pandemic, provides loans to small businesses so they can keep employees on their payroll. We argue that FinTech firms' reliance on technology rather than relationship-banking approaches used by traditional banks helps to address discrimination in lending, at least in part. Using newly released data on the PPP program, we find support for our arguments: while Black-owned businesses received loans that were approximately 50 percent lower than observationally similar White-owned businesses, the effect disappears when FinTechs are allowed to provide loans.

Game Theory of Self-Reporting Race in Small Business Loan Applications: Evidence from PPP Loans in Durham, NC

Raffi E. García
,
Rensselaer Polytechnic Institute
William A. Darity Jr.
,
Duke University

Abstract

This paper explores the game-theoretic channels of self-reporting race in small business loan applications. Using data from the Paycheck Protection Program (PPP), which was implemented to help small businesses during the Covid-19 pandemic, we find that small business owners that reported their race received an average of approximately $35,000 less in funding across all races, providing evidence of a penalty for self-reporting race. Self-reported black owners fared the worst compared to the unreported race subsample facing a 42 percent funding gap. When compared to self-reported white borrowers, the magnitude of the effect remains similar, but the statistical significance disappears. This suggests that financial institutions do compare across self-reported racial groups. Hence, any bias against black borrowers also hurts white borrowers that self-report their race. In terms of gender, the findings show that black female owners did not experience an additional funding gap outside of the racial funding gap faced by all black owners. These findings are consistent with a prisoner dilemma theoretical framework, in which all participants are better off by not self-reporting race.

Discussant(s)
David G. Blanchflower
,
Dartmouth College
Javier Miranda
,
Halle Institute for Economic Research (IWH)
Nikolas Zolas
,
U.S. Census Bureau
William A. Darity Jr.
,
Duke University
Adji Fatou Diagne
,
U.S. Census Bureau
JEL Classifications
  • J7 - Labor Discrimination
  • G3 - Corporate Finance and Governance