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June 2020 Revised June 2025
JEL classification: D31, E24, G21, O15
Authors: Manthos Delis, Fulvia Fringuellotti, Maria Iosifidi, and Steven Ongena
Small business entrepreneurs facing credit constraints may experience significantly different future income trajectories compared to their unconstrained counterparts. 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 loan approval process. Our findings indicate that loan acceptance increases recipients’ real income by eleven percent five years later compared to rejected applicants. This effect persists across a wide range of robustness tests and is primarily driven by the utilization of borrowed funds for profitable investments, as captured by the bank’s ex-ante soft information and the ex-post firm performance. Additionally, within the cohort of accepted applicants, future income is higher for those who were easily accepted compared to marginally accepted borrowers with similar creditworthiness, highlighting the important efficiency effects of loan usage.
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.
Maria Iosifidi
I, Maria Iosifidi, declare that I have 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.
