A “financial ecosystem” consists of the networks of borrowing relationships between firms and the suppliers of credit in a given neighborhood. In this research project, Mark Garmaise and Gabriel Natividad (NYU) utilized a data repository exploiting geographical information on the population of bank-firm relationships in the whole Peruvian economy between 2001 and 2012 to analyze financial ecosystems across the country. More broadly, the research aimed to provide policy-relevant direction to understand the nature and working of financial ecosystems, with an emphasis on how to preserve and enhance the functioning of fragile communities of small businesses.

The research performed resulted in a working paper titled “Does More Information Lead to More Financing? Local Information Shocks and Bank Credit.” The paper was submitted for publication to a top-tier economics and finance journal. A key component of the research effort, supported by the CGM was the involvement of a UCLA doctoral student who provided research assistant support in geographic information system coding in mapping firms and constructing neighborhood boundaries and other aspects of the study. The main finding was that more information leads to the provision of less financing, not more. Information production may therefore not be an unmixed blessing for borrowers and the analysis raises questions about the benefits to firms arising from the work of information intermediaries such as banks, venture capitalists and credit rating agencies. The results also suggest that small businesses may actually receive too much financing, rather than too little, as is generally argued. The findings indicate the need for a more complex understanding of the role of information frictions in influencing the supply of financing.

The research may have implications for improving policies on government loan subsidies to small firms, banking regulations and the siting decisions of entrepreneurial firms. The authors’ relationship with the Peruvian banking authorities may also assist in the implementation of policy recommendations emerging from this research.