Democratizing Entry: Banking Deregulations, Financing Constraints, and Entrepreneurship

William R. Kerr; Ramana  Nanda

Article | Journal of Financial Economics | October 2009

Democratizing Entry: Banking Deregulations, Financing Constraints, and Entrepreneurship

Abstract

We examine entrepreneurship and creative destruction following US banking deregulations using Census Bureau data. US banking reforms brought about exceptional growth in both entrepreneurship and business closures. Most of the closures, however, were the new ventures themselves. Although we do find evidence for the standard story of creative destruction, the most pronounced impact was a massive increase in churning among new entrants. We argue that creative destruction requires many business failures along with the few great successes. The successes are very difficult to identify ex ante, which is why democratizing entry is an important trait of well-functioning capital markets.

Keywords: Entrepreneurship; Governing Rules, Regulations, and Reforms; Market Entry and Exit; Capital Markets; Banks and Banking; Growth and Development; Disruptive Innovation;

Format: Print

26 pages

Find at Harvard Read Now

Citation:

Kerr, William R., and Ramana Nanda. "Democratizing Entry: Banking Deregulations, Financing Constraints, and Entrepreneurship." Journal of Financial Economics 94, no. 1 (October 2009): 124–149.

Western Governors University (WGU) was a nonprofit institution of higher education whose online learning model served more than 100,000 students in 2019 and was scaling rapidly. President Scott Pulsipher wanted to expand WGU’s reach to millions more with a plan called 10x Vision. 10x Vision called for scaling enrollment, creating new ventures to expand access to higher education that complement WGU’s business model, and funding these ventures. Pulsipher believed WGU had a potential target market of 40 million people in the United States, as an increasing number of jobs required post-secondary education. How could WGU help these individuals participate in the higher education system and achieve upward mobility?

How can policymakers and business leaders address AI and automation's potential for widespread labor market displacement? This case examines potential policy responses, looking closely at the United States' existing social safety net and the impacts of implementing Universal Basic Income or a federal job guarantee.

We use the construction of India's Golden Quadrangle (GQ) central highway network, together with comprehensive loan data drawn from the Reserve Bank of India, to investigate the interaction between infrastructure development and financial sector depth. We identify a disproportionate increase in loan count and average loan size in districts along the GQ highway network using stringent specifications with industry and district fixed effects. Our results hold in straight-line IV frameworks and are not present in “placebo tests” with another highway that was planned to be upgraded at the same time as GQ but subsequently delayed. Importantly, however, results are concentrated in districts with stronger initial financial development, suggesting that while financing does respond to large infrastructure investments and help spur real economic outcomes, initial financial sector development might play an important role in determining where real activity will grow.

Faculty & Research

Democratizing Entry: Banking Deregulations, Financing Constraints, and Entrepreneurship

Abstract

Citation:

About the Authors

More from these Authors