DP13468 Credit and Income

Author(s): Manthos Delis, Fulvia Fringuellotti, Steven Ongena
Publication Date: January 2019
Keyword(s): Business loans, credit constraints, Income, Income inequality, regression discontinuity design
JEL(s): D31, E24, G21
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13468

Using a unique data set of business loan applications to a single bank from individuals who are majority owners of small firms, we study how bank credit origination or denial affects individuals' income. The bank cutoff rule based on the applicants' credit score creates a sharp discontinuity in the decision to originate loans or not. We show that loan origination increases recipients' income five years onward by more than 10% compared to denied applicants. The effect is more pronounced in rural and low-income areas. Our results suggest an important role for banks` credit decisions on the distribution of income.