DC Accepted Papers Paper: Constrained or Not Constrained? Identifying Financially Constrained Firms in the Brazilian Economy

*Names in bold indicate Presenter

Daniel Grimaldi, George Mason University

Credit constraints jeopardize the capacity of entrepreneurs to push forward investment projects that would generate social benefits. Consequently, this market failure affects the entire economy by reducing investment and competitiveness levels, which leads to inferior growth rates and welfare. For all these reasons, and especially in developing countries, there is room for pareto improvement through public policies that correctly address that market failure and alleviate its effects. There are examples of programmes that were able to promote credit access with positive impacts on investment (Cavalcanti and Vaz (2017) and Banerjee and Duflo (2014)), employment (Brown and Earle (2017)), and export performance (Zia (2008)). However, the efficacy of such policies is directly dependent on their capacity to target the right entrepreneurs. Otherwise, public action may be innocuous or, in the worst-case scenario, lead to efficiency loss by artificially directing credit to companies that use it only to replace more expensive funding sources, without changing their investment decisions (Lazzarini et al. (2015) and Bonomo, Brito, and Martins (2015)) or increasing their integration to foreign trade (Zia (2008)).

If a policy is not able to target credit-constrained companies with more accuracy than the available lending technologies used by the financial sector, a pareto improvement would be achieved only by chance. That is why the main objective of this research is to test the adequacy of traditional credit constraint measures to the Brazilian reality by evaluating their capacity to explain the firms investment and export dynamics. Though quite popular in the academic literature, none of them have been tested in the context of developing economies – precisely where this market failure should be more pervasive. In particular, this work will evaluate how companies identified as creditconstrained, as compared to unconstrained ones, react after accessing subsidized loans from the Brazilian Development Bank (BNDES). According to the economic theory, impact of these loans (that might be understood as a treatment) on investment and export levels should be higher among the first group.

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