American Economic Review Vol. 114 No. 9 2024

Big Loans to Small Businesses: Predicting Winners and Losers in an Entrepreneurial Lending Experiment

Gharad Bryan¹; Dean Karlan²; Adam Osman³

¹ London School of Economics, J-PAL, and CEPR (email: ) · ² Northwestern University, IPA, J-PAL, and NBER Research Associate, on leave at the United States Agency for International Development (email: ) · ³ University of Illinois Urbana-Champaign and J-PAL (email: )

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.

DOI

10.1257/aer.20220616

Volume

114

Issue

9

Pages

2825-2860

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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