Credit and Entrepreneurs’ Income
90 Pages Posted: 29 Jun 2020 Last revised: 22 Nov 2024
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Credit and Entrepreneurs’ Income
Date Written: June 01, 2020
Abstract
Small business entrepreneurs facing credit-constraints may have significantly different future income paths compared to unconstrained entrepreneurs. We quantify this difference using uniquely detailed loan application data and a regression discontinuity design based on a bank’s credit score cutoff rule employed in the decision to grant loans. We find that application acceptance increases recipients’ income five years later by 11 percent compared to rejected loan applicants. This effect survives in a large battery of robustness tests and is driven by the use of borrowed funds to make profitable investments. We also document that our results mostly reflect an upward mobility of poor individuals.
Keywords: credit constraints, entrepreneurs’ income, business loans, economic mobility, regression discontinuity design
JEL Classification: D31, E24, G21, O15
Suggested Citation: Suggested Citation