Credit, Income and Inequality

71 Pages Posted: 29 Jun 2020 Last revised: 18 Mar 2021

See all articles by Manthos D. Delis

Manthos D. Delis

Montpellier Business School

Fulvia Fringuellotti

Federal Reserve Banks - Federal Reserve Bank of New York

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

Date Written: March 16, 2021

Abstract

Analyzing unique data on loan applications by individuals who are majority owners of small firms, we detail how a bank’s credit decisions affect their future income. We use the bank’s cutoff rule, which is based on the applicants’ credit scores, as the discontinuous locus providing exogenous variation in the decision to grant loans. We show that application acceptance increases recipients’ income five years later by more than 10% 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

Delis, Manthos D. and Fringuellotti, Fulvia and Ongena, Steven R. G., Credit, Income and Inequality (March 16, 2021). FRB of New York Staff Report No. 929, Proceedings of Paris December 2020 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3631252 or http://dx.doi.org/10.2139/ssrn.3631252

Manthos D. Delis

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, 34080
France

Fulvia Fringuellotti (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York

33 Liberty Street
New York, NY 10045
United States

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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