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

See all articles by Gharad Bryan

Gharad Bryan

London School of Economics & Political Science (LSE) - Department of Economics

Dean Karlan

Northwestern University

Adam Osman

University of Illinois at Urbana-Champaign; Massachusetts Institute of Technology (MIT) - Abdul Latif Jameel Poverty Action Lab (J-PAL); Economic Research Forum (ERF)

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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.

Suggested Citation

Bryan, Gharad and Karlan, Dean and Osman, Adam, Big Loans to Small Businesses: Predicting Winners and Losers in an Entrepreneurial Lending Experiment (September 2021). NBER Working Paper No. w29311, Available at SSRN: https://ssrn.com/abstract=3931834

Gharad Bryan (Contact Author)

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Dean Karlan

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Adam Osman

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL Champaign 61820
United States

Massachusetts Institute of Technology (MIT) - Abdul Latif Jameel Poverty Action Lab (J-PAL) ( email )

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Cambridge, MA 02142
United States

Economic Research Forum (ERF) ( email )

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(P.O. Box: 12311)
Dokki, Cairo
Egypt

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