Does Access to Credit Come with Access to Voting? Democracy and Firm Financing Constraints

Access to credit is one of the main obstacles for the growth of firms. We test the hypothesis that democracy exerts an impact on access to credit. Democratic development is expected to alleviate credit constraints for firms by favoring inclusive institutions and by strengthening the institutional framework. We perform regressions at the firm-level on a large dataset of 46,000 firms in 108 countries. We find evidence of a negative effect of democratic development on credit constraints for firms. We further establish that democratic development contributes to reduce borrower discouragement and leads to more bank loan approval decisions. Our key finding is therefore that democracy favors access to credit. Our work contributes to the debate on the impact of democracy on economic development by considering one firm-level channel of transmission.