Information Technology Improvement and Small Business Lending

41 Pages Posted: 31 Jul 2018 Last revised: 22 Nov 2018

See all articles by Linda (Haiyan) Pang

Linda (Haiyan) Pang

Arizona State University (ASU), W.P. Carey School of Business

Date Written: July 30, 2018

Abstract

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

Suggested Citation

Pang, Linda (Haiyan), Information Technology Improvement and Small Business Lending (July 30, 2018). 31st Australasian Finance and Banking Conference 2018, Available at SSRN: https://ssrn.com/abstract=3223144 or http://dx.doi.org/10.2139/ssrn.3223144

Linda (Haiyan) Pang (Contact Author)

Arizona State University (ASU), W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

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