Credit, Income, and Inequality

Abstract: How does credit access for small business owners affect the growth and inequality of their future income? A bank’s cutoff rule, employed in the decision to grant loans and based on applicants’ credit scores, provides us with the exogenous variation needed to answer this question. Analyzing uniquely detailed loan application data, we find that application acceptance increases recipients’ income five years later by more than 10 percent 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: regression discontinuity design; income; credit constraints; business loans; income inequality; economic mobility;

JEL Classification: D31; E24; G21; O15;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2020-06-01

Number: 929

Note: Revised October 2021.