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Discussion Paper
Credit, Income, and Inequality
Access to credit plays a central role in shaping economic opportunities of households and businesses. Access to credit also plays a crucial role in helping an economy successfully exit from the pandemic doldrums. The ability to get a loan may allow individuals to purchase a home, invest in education and training, or start and then expand a business. Hence access to credit has important implications for upward mobility and potentially also for inequality. Adverse selection and moral hazard problems due to asymmetric information between lenders and borrowers affect credit availability. Because ...
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Credit and Entrepreneurs’ Income
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 ...