Does the Community Reinvestment Act (CRA) Promote Small Business Growth in Lower-Income Neighborhood

Abstract

In this paper, I estimate the impact of the Community Reinvestment Act (CRA) on small business growth in “Low- and Moderate-Income” (LMI) neighborhoods in the United States. Using rich firm-level panel data on every U.S. employer, I use two principle identification strategies to estimate the effects on business employment. First, I exploit the sharp threshold cutoff for CRA eligibility based on median family income to use a regression discontinuity design (RDD) in an optimal bandwidth around the cutoff. Second, I exploit changes in CRA eligibility over time using difference-in-differences (DID) with firm fixed effects. Using both RDD and DID, I find that the firms located in the CRA eligible areas increase employment by about 0.8 percent compared to firms in non-CRA areas. The CRA effects are larger for young firms and firms in minority neighborhoods, which potentially face higher barriers to access to credit, increasing employment by about 1.5 and 1.9 percent, respectively. I also find that increases in lending in the CRA areas are related to the number of banks, implying that the channel is greater access to finance.