Report
Credit, Income, and Income Inequality
Abstract: How does credit access for small business owners affect their 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 ten percent compared to denied applicants. Looking across various salient groups of applicants, we find that relatively constrained groups, i.e. new, levered, or high-growth firms, female-owned firms, or firms located in low-income regions, display higher responses to credit origination. This effect is driven by the use of borrowed funds to make investments and mostly reflects the upward mobility of poor individuals.
Keywords: credit constraints; income inequality; business loans; economic mobility; regression discontinuity design;
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 August 2024. Previous titles: “Credit and Income Inequality," "Credit, Income, and Inequality,” and “Credit and Income”