by increasing the borrowing cost in other loans to the same client.<sup>8</sup> In other words, lenders with market power would offer borrowers subsidized loans together with other more expensive loans that partially offset some of the discounts on the subsidized credit. In this context, the transmission of the subsidy to the final borrower has to be studied in terms of its effects on the total cost of credit (i.e., interest rates on both earmarked and non-earmarked loans). We argue that such crossproduct pricing strategies should be present whenever the bank cannot fully adjust the interest rate of the earmarked loan, that is, when the interest rate ceiling is binding as is the case for riskier borrowers. Furthermore, these price adjustments should be more pronounced if banks have more market power, for example, in less competitive lending markets or for firms that are less likely to switch between lenders.

We use administrative loan-level data from the Brazilian Central Bank credit registry, which includes the universe of (free-market) working capital loans issued to close to nine hundred thousand firms by 127 private banks between 2005 and 2016. Financing of working capital accounts for 44% of the total outstanding volume of private credit to businesses in the free market. We further augment our data by including information (e.g., originating bank, date, and credit type) on all earmarked loans received during the period for each firm in the sample. In all, this unique data set allows us to analyze how banks allocate earmarked loans across firms and how the government program may impact credit terms on their new free-market loans.

We document a novel cross-selling strategy whereby banks “bundle” governmentsponsored loans with privately funded short-term credit. We show that when a bank issues a government loan, it increases the interest rate of non-earmarked loans to the same borrower –on average a 0.34 percentage points (pp) increase in the interest rate of working capital loans disbursed together or after the earmarked loan (i.e., a 1.3 percent increase of the average interest rate in our sample). Notably, there is substantial heterogeneity in banks’ strategies. These bundles of earmarked and non-earmarked loans are more likely among riskier borrowers, and the price adjustment of the non-earmarked loan is exclusive to riskier clients, with interest rates increasing by 1.08 pp. Consistent with our hypothesis on the role of market power, we find that in geographical locations where the banking industry is more concentrated, the price increase is more pronounced, with borrowers paying an additional 1.47 pp in their non-earmarked loans.

There are some major challenges to test our hypothesis. For example, firms that apply for and receive earmarked loans are likely to differ from nonrecipient firms. Among recipients, the willingness to obtain loans in bundles might be a signal of project riskiness. To address these concerns, we proceed as follows. First, we saturate our empirical specifications with a series of fixed effects at the bank-year and firm-bank level that allow us to isolate variation in the data in different ways. For instance, the inclusion of firm-bank fixed effects allows us to exploit variation in the interest rates on all working capital loans of the same firm-bank pair over time and examine how these rates change after the pair starts an earmarked credit relationship. To more cleanly reduce the selection problem, we further restrict the sample to recipient firms—those that at some point receive an earmarked loan—and examine how the credit terms of these firms change after they obtain this loan. Consistently, our impact estimates remain similar throughout our different specifications.

> 8 It is well-established that banks derive multiple benefits from their lending relationships, such as enhanced sales in other products (Petersen and Rajan 1994; Kanatas and Qi 2003; Bharath et al. 2007).

3