Download This PaperCredit, Income, and Inequality
FRB of New York Staff Report No. 929, Rev. March 2022
Proceedings of Paris December 2020 Finance Meeting EUROFIDAI - ESSEC
78 Pages Posted: 29 Jun 2020 Last revised: 8 Mar 2022
Date Written: March 16, 2021
Abstract
How does credit access for small business owners affect the growth and inequality of their future income? A bank’s cutoff rule, employed in the decision to grant loans and based on applicants’ credit scores, provides us with the exogenous variation needed to answer this question. Analyzing uniquely detailed loan application data, we find that application acceptance increases recipients’ income five years later by more than 10 percent compared to denied applicants. This effect is mostly driven by the use of borrowed funds to undertake investments and is stronger when individuals are more credit-constrained.
Keywords: credit constraints, income, business loans, economic mobility, income inequality, regression discontinuity design
JEL Classification: D31, E24, G21, O15
Suggested Citation: Suggested Citation
Swiss Finance Institute
c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland