Information Technology Improvement and Small Business Lending
41 Pages Posted: 31 Jul 2018 Last revised: 22 Nov 2018
Date Written: July 30, 2018
This paper evaluates how information technology (IT) improvements contribute to the decline of small business lending in the US commercial banking market from 2002 to 2017. I estimate a general equilibrium dynamic model with banks that differ in sizes and choose the level of transaction (hard information intensive) and relationship (soft information intensive) lending. The model shows that banks’ costs of evaluating borrowers’ hard information declined over this period by 46%, and small business loans fell by 7% (12% in the data). I find that banks’ higher reliance on IT to issue transaction loans is responsible for 37% of the decline in the data, and the consolidation caused by IT improvements caused 22% of the decline. Contrary to previous work, I find that when general equilibrium is considered, policy protecting small banks cannot increase small business lending.
Keywords: Information technology, small business lending, relationship banking, innovation, fin-tech
JEL Classification: G21
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