Credit, Income and Inequality
71 Pages Posted: 29 Jun 2020 Last revised: 18 Mar 2021
Date Written: March 16, 2021
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
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