Report

Credit, Income and Inequality


Abstract: 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 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;

Access Documents

File(s): File format is text/html https://www.newyorkfed.org/research/staff_reports/sr929.html
Description: Summary

File(s): File format is application/pdf https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr929.pdf
Description: Full text

Authors

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2020-06-01

Number: 929