Welcome to today's episode of Cato Daily Podcast. It is Thursday, April 19. I'm

Anastasia Glova. The new issue of Regulation magazine,

Volume 10, features an article on the disappointing tenure of the Small Business Administration,

the Federal Government Agency that guarantees loans made by banks to small businesses.

In the article, Mercadis Senior Fellow and Cato adjunct scholar Veronique Daruji

argues that small business in America just doesn't need the SBA around. I'm on the phone

with Veronique for this interview. What makes it difficult for small businesses

to acquire credit? Well what might make it difficult is the fact that small businesses are usually

engage in riskier activities and also that it might be hard for the lenders to acquire information about a new and small

business because they don't really have a history, they might actually have a poor credit

history and this lack of information for the lender can make it riskier to lend money.

So then the perceived market failure that the SBA aims to address is an information problem?

Yes, it's totally an information problem.

The thing that we need to remember is that the SBA has been around for 53 years, so the

capital market 53 years ago was different and they still haven't adjust their theory about the

capital market but what is clear is that if there is a problem it's an

information problem it's this high cost in theory for the lender to acquire information about a new

firm or a small firm that is likely to be engaged in a risky business.

And this causes an adverse selection against all small firms.

Yes, well what ends up happening is the firm because they can't really access this

information at a low cost will just abstain from issuing credit to small firms in general and that of

course is only the theory.

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