One alternative channel is that as firms obtain more government-sponsored credit, they become riskier due to their higher leverage. In turn, banks increase the price of free-market loans after they issue an earmarked loan. While this mechanism is in line with Hypotheses 1 and 2, there is an important distinction to be made. In the cross-product pricing hypothesis, only the bank issuing an earmarked loan is expected to increase the price of free-market credit to the firm. Other lenders of the same firm are not expected to adjust the price and quantities of working capital loans. Conversely, if earmarked credit signals higher firm risk, both the bank issuing the earmarked loan and other banks would increase the interest rate in new working capital loans to the firm.<sup>13</sup> While the credit risk channel does not explicitly generate testable implications based on the banks’ market power, it is possible that riskier firms are precisely located in areas where the banking sector is more concentrated. Consequently, there would be a mechanical relation between the increase in earmarked credit and the interest rate of working capital loans in places where lenders have more marker power (a composition effect). If the price change in working capital loans is related to changes in firm risk, banks should adjust their provision rates precisely for firms and in loans where they are increasing the interest rate. Formally stated:

**Hypothesis 5:** _After issuing an earmarked loan, banks increase the provision rate of working capital loans to the same client, and the increase is more pronounced for riskier firms located where the banking industry is more concentrated._

To summarize, price mark-ups in working capital loans for (i) riskier firms and (ii) among banks with higher market power are broadly in line with cross-product pricing strategies. While the credit reallocation and credit risk channels might also explain these outcomes, such alternative hypotheses generate additional predictions. For instance, under the credit reallocation channel, we would expect to observe a simultaneous decline in working capital loan volume to recipients of earmarked loans; a behavior that should be more pronounced for riskier firms and banks with market power. In the case of credit risk, we would expect to observe an increase in loan provisions, precisely for firms that pay the highest mark-ups in new working capital loans.

# **4. Empirical Methodology**

# **4.1. Test of cross-product pricing strategies (Hypothesis 1)**

We first examine whether banks adjust the pricing of non-earmarked products after a borrower receives an earmarked loan. The empirical specification is summarized as follows: l l 0 1E E E l l l l l l l (1) In Equation (1), l l denotes the interest rate spread of a working capital loan ll _l_ issued at yy = αα + αα EE + XX + γγ + γγ +uu month _t_ to firm _f_ by bank _b_ . We introduce the variable E E E l to capture the start of an yy earmarked credit relationship of a firm-bank pair. This indicator variable equals one after the first ll earmarked loan is issued to firm _f_ by bank _b_ and zero otherwise. Thus, our test of Hypothesis 1 is EE

> 13 In Brazil, information sharing through the credit registry helps banks distinguish loan applicants with earmarked loans; hence, it is expected that all banks internalize this information and price new free-market loans accordingly.

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