Do Firms Want to Borrow More? Testing Credit Constraints Using a Directed Lending Program

They begin the paper by laying out a simple methodology that allows them to determine whether firms are credit constrained, based on how they react to changes in directed lending programs. The basic idea is that while both constrained and unconstrained firms may be willing to absorb all the directed credit that they can get (because it may be cheaper than other sources of credit), constrained firms will use it to expand production, while unconstrained firms will primarily use it as a substitute for other borrowing. [BREAD Working Paper No. 005] URL: [http://ipl.econ.duke.edu/bread/papers/working/005revised2004.08.pdf]