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Discussion Paper Details

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Title: Big Loans to Small Businesses: Predicting Winners and Losers in an Entrepreneurial Lending Experiment

Author(s): Gharad Bryan, Dean S. Karlan and Adam Osman

Publication Date: September 2021

Keyword(s): Enterprise credit, entrepreneurship, Heterogeneous Treatment Effects, Psychometric data and Small and medium enterprises

Programme Area(s): Development Economics and Labour Economics

Abstract: We experimentally study the impact of substantially larger enterprise loans in Egypt. Larger loans generate small average impacts, but machine learning using psychometric data reveals that "top-performers" (those with the highest predicted treatment effects) substantially increase profits, while profits drop for poor-performers. The large differences imply that lender credit allocation decisions matter for aggregate income, yet we find that existing practice leads to substantial misallocation. We argue that some entrepreneurs are over-optimistic and squander the opportunities presented by larger loans by taking on too much risk, and show the promise of allocations based on entrepreneurial type relative to firm characteristics.

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Bibliographic Reference

Bryan, G, Karlan, D and Osman, A. 2021. 'Big Loans to Small Businesses: Predicting Winners and Losers in an Entrepreneurial Lending Experiment'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=16573