Requisite variety theory and third‐party guarantee loans: How local bank branches can reduce loan defaults

Abstract

Requisite variety theory posits that internal variety is essential to develop responses to external variety. Facing increased local competition local bank branches could lower the odds of Small Business Administration (SBA) loan defaults by increasing knowledge variety through variations in geographic distances and industries among SBA loans. Our analysis shows that although local competition increases the odds of default, variations in industries represented in the SBA portfolio, the variation in geographic distances among loans in the portfolio lowers the odds of default. Our study emphasizes the importance of requisite variety at the branch level and presents important implications for policymakers and practitioners in the third‐party loan guarantee milieu.