SURVIVING CREDIT MARKET COMPETITION

Empirical studies have documented that improvements in credit supply have important effects on entry in nonfinancial industries. This article shows that changes in credit supply conditions have much deeper effects on firms' population dynamics, well above and beyond the experience of entry. I explore the hypothesis that changes in credit supply have important effects on the demand side as well. I conjecture that when financial capital is difficult to obtain, while fewer firms may enter, those entering are drawn from a population with a better distribution of entrepreneurial quality. In an environment where financial capital is easily obtainable instead, the population of loan applicants changes as well, including those in a tougher environment who would not have tried entrepreneurship in the first place. These changes in the population of applicants imply significant effects on firms' life expectancy profile, and these effects are heterogeneous across firms of different vintage. Modifications in life expectancy are likely to affect firms' incentives in undertaking future capital investment and likewise investments in technological innovation. Hence, these changes in overall firms' population dynamics characterize an explicit mechanism through which finance can affect real economic activity.