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June 2020 Revised September 2023
JEL classification: D31, E24, G21, O15
Authors: Manthos Delis, Fulvia Fringuellotti, and Steven Ongena
How does credit access for small business owners affect income inequality? 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 10 percent compared to denied applicants. This effect is mostly driven by upward mobility of poor individuals, especially if credit-constrained, thereby reducing income inequality among those who get credit. Looking across various salient groups of applicants, we find that relatively constrained groups—that is, firms from low-income regions, new or high-growth firms, or female-owned firms—display higher responses to credit origination for their relatively poor applicants, while the effects for the rich applicants are at best negligible.
Manthos Delis declares that she has no relevant or material financial interests that relate to the research described in this paper.
Fulvia Fringuellotti
Fulvia Fringuellotti declares that she has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Steven Ongena
I declare that I have no relevant or material financial interests that relate to the research described in the paper Delis, Manthos, Fulvia Fringuellotti and Steven Ongena, 2020, Credit, income and inequality. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
