Report

Credit and Entrepreneurs’ Income

Abstract: Small business entrepreneurs facing credit-constraints may have significantly different future income paths compared to unconstrained entrepreneurs. We quantify this difference using uniquely detailed loan application data and a regression discontinuity design based on a bank’s credit score cutoff rule employed in the decision to grant loans. We find that application acceptance increases recipients’ income five years later by 11 percent compared to rejected loan applicants. This effect survives in a large battery of robustness tests and is driven by the use of borrowed funds to make profitable investments. We also document that our results mostly reflect an upward mobility of poor individuals.

Keywords: credit constraints; income inequality; business loans; economic mobility; regression discontinuity design; entrepreneurs’ income;

JEL Classification: D31; E24; G21; O15;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2020-06-01

Number: 929

Note: Revised November 2024. Previous titles: “Credit, Income, and Income Inequality," "Credit and Income Inequality," "Credit, Income, and Inequality,” and “Credit and Income”