Democracy favors access to credit of firms

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. We perform regressions at the firm-level on a large dataset of 46,000 firms in 108 countries. We find evidence of a negative relationship between democracy and credit constraints for firms. We further establish that democracy contributes to reduce borrower discouragement and leads to more bank loan approval decisions. Our key finding is therefore that democracy favors firms' 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.