American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Big Loans to Small Businesses: Predicting Winners and Losers in an Entrepreneurial Lending Experiment
American Economic Review
vol. 114,
no. 9, September 2024
(pp. 2825–60)
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.Citation
Bryan, Gharad, Dean Karlan, and Adam Osman. 2024. "Big Loans to Small Businesses: Predicting Winners and Losers in an Entrepreneurial Lending Experiment." American Economic Review, 114 (9): 2825–60. DOI: 10.1257/aer.20220616Additional Materials
JEL Classification
- C45 Neural Networks and Related Topics
- D22 Firm Behavior: Empirical Analysis
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- L25 Firm Performance: Size, Diversification, and Scope
- L26 Entrepreneurship
- O16 Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance