The Information Revolution and Small Business Lending: The Missing Evidence
Federal Reserve Bank of Atlanta Working Paper Series No. 2010-7
21 Pages Posted: 28 Mar 2010
Date Written: March 1, 2010
This paper provides empirical confirmation for Petersen and Rajan's (2002) widely accepted conjecture that information technology was the primary driver of the observed increase in small business borrower-lender distances in the United States in recent years. Using a different data source for small business loans, we show that annual increases in borrower-lender distances were slow and steady prior to 1993 (the end point in Petersen and Rajan's data) but accelerated rapidly after that. Importantly, we are able to assign at least half of this acceleration to the adoption of credit scoring technologies by the lending banks. Our tests also reveal strong statistical associations between lending distances and borrower characteristics, lender characteristics, market conditions, regulatory constraints, moral hazard incentives, and principal-agent incentives.
Keywords: borrower-lender distance, credit scoring, information technology, small business lending
JEL Classification: G21, O33
Suggested Citation: Suggested Citation