May 2021

IZA DP No. 14403: Black Entrepreneurs, Job Creation, and Financial Constraints

Mee Jung Kim, Kyung Min Lee, J. David Brown, John S. Earle

Black-owned businesses tend to operate with less finance and employ fewer workers than those owned by Whites. Motivated by a simple conceptual framework, we document these facts and show they are causally connected using large firm-level surveys linked to universal employer data from the Census Bureau. We find that the racial financing gap is most pronounced at start-up and tends to narrow with firm age. At any age, Black-owned firms are less likely to receive bank loans, more likely to refrain from applying because they expect denial, and more likely to report that lack of finance reduces their profitability. Yet the observable characteristics of Black entrepreneurs are similar in most respects to Whites, and in some ways - higher education, growth-oriented motivations, and involvement in the business - would seem to imply higher, not lower, demand for finance. Concerning employment, we find that Black-owned firms have on average about 12 percent fewer employees than those owned by Whites, but the difference drops when controlling for firm age and other characteristics. However, when the analysis holds financial variables constant, the results imply that equally well-financed Black-owned firms would be larger than White-owned by about seven percent. Exploiting the credit supply shock of changing assignment to Community Reinvestment Act treatment through a Regression Discontinuity Design in a firm-level panel regression framework, we find that expanded credit access raises employment 5-7 percentage points more at Black-owned businesses than White-owned firms in treated neighborhoods.