Big loans to small businesses: predicting winners and losers in an entrepreneurial lending experiment

Bryan, Gharad ORCID: 0009-0000-2449-930X, Karlan, Dean and Osman, Adam (2024) Big loans to small businesses: predicting winners and losers in an entrepreneurial lending experiment. American Economic Review, 114 (9). 2825 - 2860. ISSN 0002-8282

Text (Big Loans to Small Businesses: Predicting Winners and Losers in an Entrepreneurial Lending Experiment) - Accepted Version Download (3MB)

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Abstract

We experimentally study the impact of relatively large enterprise loans in Egypt. Larger loans generate small average impacts, but machine learning using psychometric data reveals "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 existing practice leads to substantial misallocation. We argue that some entrepreneurs are overoptimistic 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.

Item Type:	Article
Official URL:	https://www.aeaweb.org/articles?id=10.1257/aer.202...
Additional Information:	© 2024 American Economic Association
Divisions:	Economics
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
JEL classification:	D - Microeconomics > D2 - Production and Organizations > D24 - Production; Cost; Capital and Total Factor Productivity; Capacity M - Business Administration and Business Economics; Marketing; Accounting > M2 - Business Economics > M21 - Business Economics O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O12 - Microeconomic Analyses of Economic Development O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O16 - Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
Date Deposited:	06 Nov 2023 10:54
Last Modified:	12 Dec 2024 03:56
URI:	http://eprints.lse.ac.uk/id/eprint/120637

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