Big Loans to Small Businesses: Predicting Winners and Losers in an Entrepreneurial Lending Experiment
70 Pages Posted: 27 Sep 2021 Last revised: 13 Aug 2023
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Big Loans to Small Businesses: Predicting Winners and Losers in an Entrepreneurial Lending Experiment
Big Loans to Small Businesses: Predicting Winners and Losers in an Entrepreneurial Lending Experiment
Big Loans to Small Businesses: Predicting Winners and Losers in an Entrepreneurial Lending Experiment
Date Written: September 2021
Abstract
We experimentally study the impact of relatively large enterprise loans in Egypt. Larger loans generate small average impacts, but machine learning using psychometric data reveals that ”top-performers” (those with the highest predicted treatment effects) substantially increase profits, while profits drop for poor-performers. The large differences imply that lender credit allocation decisions matter for aggregate income, yet we find that existing practice leads to substantial misallocation. We argue that some entrepreneurs are over-optimistic and squander the opportunities presented by larger loans by taking on too much risk, and show the promise of allocations based on entrepreneurial type relative to firm characteristics.
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