product pricing strategies are more pronounced in lending markets and for firms for which banks can exert more market power.

Finally, we contribute to the literature that studies government-driven lending. A large body of empirical work examines whether government credit crowds in or out credit by private lenders, and whether public lending promotes financial development and growth (King and Levine 1993; Demirgüç-Kunt and Maksimovic 1998; Rajan and Zingales 1998). These earlier studies explored the aggregate effects of government credit, but more recent work relies on rich firm- and loan-level data from government-owned banks to evaluate real effects (Carvalho 2014; Ru 2017). An important yet overlooked question is related to the role of private banks as intermediaries of government loans. In Brazil, private commercial banks disburse up to 40% of governmentsponsored loans. We use detailed loan-level data to provide comprehensive analysis on the allocation of credit and pricing strategies of private banks participating in the governmentsponsored lending program. Our evidence that banks engage in cross-selling strategies suggests that the design of government programs should consider the credit market structure. For example, banks might prioritize larger firms due to the potential added sales in nonlending products (e.g., investment banking services, deposit-related products, etc.). Whether an excessive focus on large firms is a desirable outcome depends on the policy objectives, but such behavior might arise naturally as banks react by spreading the cost of lending over multiple products.

The rest of the paper is organized as follows. Section 2 describes the institutional background and data. We derive our hypotheses in Section 3 and present our empirical methodology in Section 4. Section 5 documents the findings. In Section 6, we present additional evidence that provides further support for the cross-product pricing hypothesis. We conclude in Section 7.

# **2. Institutional Background and Data**

In this section, we describe the main features of the Brazilian credit market and describe our comprehensive dataset of loans to firms.

# **2.1. Brazil’s Credit Market**

The credit market of Brazil is characterized by an extensive presence of government-driven lending. Public interventions include a complex web of price and quantity regulations, reserve requirements, tax exemptions, and forced savings schemes to target credit to specific projects. Lending directed by these initiatives is known as earmarked credit. Earmarked loans in Brazil complement the usual market for credit provided by commercial banks. Over the years, earmarked lending has grown substantially, exceeding 50% of total credit by 2015. Earmarked credit has been used as a policy response to alleviate credit constraints and promote access to credit among individuals and firms, including micro, small, and medium-sized businesses.

Earmarked credit to firms is largely directed to finance specific projects that include fixed investments, infrastructure, development projects, and rural activities.<sup>10</sup> Among all the earmarked loans issued to firms between 2005 and 2016, 88% financed fixed-asset purchases such as new

> 10 Earmarked credit to households mostly targets real estate financing.

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