Hostname: page-component-78c5997874-94fs2 Total loading time: 0 Render date: 2024-11-04T06:02:49.869Z Has data issue: false hasContentIssue false
  • English
  • Français

Business Microloans for U.S. Subprime Borrowers

Published online by Cambridge University Press:  12 April 2016

Cesare Fracassi ,
Mark J. Garmaise ,
Shimon Kogan  and
Gabriel Natividad
Cesare Fracassi*
Affiliation:
cesare.fracassi@mccombs.utexas.edu, University of Texas at Austin, McCombs School of Business, Austin, TX 78712
Mark J. Garmaise
Affiliation:
mark.garmaise@anderson.ucla.edu, University of California at Los Angeles, Anderson School of Management, Los Angeles, CA 90095
Shimon Kogan
Affiliation:
skogan@idc.ac.il, Interdisciplinary Center (IDC) Herzliya, Arison School of Business, Herzliya 46150, Israel, and University of Texas at Austin
Gabriel Natividad
Affiliation:
gabriel.natividad@udep.pe, Universidad de Piura, Department of Economics, Lima 18, Peru.
*
*Corresponding author: cesare.fracassi@mccombs.utexas.edu
Get access Rights & Permissions [Opens in a new window]

Abstract

We show that business microloans to U.S. subprime borrowers have a very large impact on subsequent firm success. Using data on startup loan applicants from a lender that employed an automated algorithm in its application review, we implement a regression discontinuity design assessing the causal impact of receiving a loan on firms. Startups receiving funding are dramatically more likely to survive, enjoy higher revenues, and create more jobs. Loans are more consequential for survival among subprime business owners with more education and less managerial experience.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 1 , February 2016 , pp. 55 - 83
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Abrevaya, J. “The Equivalence of Two Estimators of the Fixed-Effects Logit Model.” Economics Letters, 55 (1997), 41–43.CrossRefGoogle Scholar
Adelino, M.; Schoar, A.; and Severino, F.. “House Prices, Collateral, and Self-Employment.” Journal of Financial Economics, 117 (2015), 288–306.CrossRefGoogle Scholar
Andersen, S., and Nielsen, K. M.. “Ability or Finances as Constraints on Entrepreneurship? Evidence from Survival Rates in a Natural Experiment.” Review of Financial Studies, 25 (2012), 3684–3710.CrossRefGoogle Scholar
Angelini, P., and Generale, A.. “On the Evolution of Firm Size Distributions.” American Economic Review, 98 (2008), 426–438.CrossRefGoogle Scholar
Angrist, J. D., and Pischke, J. S.. Mostly Harmless Econometrics: An Empiricist’s Companion. Princeton, NJ: Princeton University Press (2009).CrossRefGoogle Scholar
Banerjee, A., and Duflo, E.. “Giving Credit Where It Is Due.” Journal of Economic Perspectives, 24 (2010), 61–79.CrossRefGoogle Scholar
Bates, T. “Entrepreneur Human Capital Inputs and Small Business Longevity.” Review of Economics and Statistics, 72 (1990), 551–559.CrossRefGoogle Scholar
Berger, A.; Frame, W.; and Miller, N.. “Credit Scoring and the Availability, Price, and Risk of Small Business Credit.” Journal of Money, Credit, and Banking, 37 (2005), 191–222.CrossRefGoogle Scholar
Bitler, M.; Moskowitz, T.; and Vissing-Jørgensen, A.. “Testing Agency Theory with Entrepreneur Effort and Wealth.” Journal of Finance, 60 (2005), 539–576.CrossRefGoogle Scholar
Bjorvatn, K., and Tungodden, B.. “Teaching Business in Tanzania: Evaluating Participation and Performance.” Journal of the European Economic Association, 8 (2010), 561–570.CrossRefGoogle Scholar
Black, S. E., and Strahan, P. E.. “Entrepreneurship and Bank Credit Availability.” Journal of Finance, 57 (2002), 2807–2833.CrossRefGoogle Scholar
Braun, S., and Schwind, C.. “Automatic, Semantics-Based Indexing of Natural Language Texts for Information Retrieval Systems.” Information Processing & Management, 12 (1976), 147–153.CrossRefGoogle Scholar
Bruhn, M.; Karlan, D.; and Schoar, A.. “The Impact of Consulting Services on Small and Medium Enterprises: Evidence from a Randomized Trial in Mexico.” Working Paper, World Bank, Yale University, and Massachusetts Institute of Technology (2013).Google Scholar
Calem, P.; Gillen, K.; and Wachter, S.. “The Neighborhood Distribution of Subprime Mortgage Lending.” Journal of Real Estate Finance and Economics, 29 (2004), 393–410.CrossRefGoogle Scholar
Card, D.; Dobkin, C.; and Maestas, N.. “The Impact of Nearly Universal Insurance Coverage on Health Care Utilization and Health: Evidence from Medicare.” Working Paper, National Bureau of Economic Research (2004).CrossRefGoogle Scholar
Carrell, S., and Zinman, J.. “In Harm’s Way? Payday Loan Access and Military Personnel Performance.” Review of Financial Studies, 27 (2014), 2805–2840.CrossRefGoogle Scholar
Cetorelli, N. “Surviving Credit Market Competition.” Economic Inquiry, 52 (2014), 320–340.CrossRefGoogle Scholar
De Mel, S.; McKenzie, D.; and Woodruff, C.. “Returns to Capital in Microenterprises: Evidence from a Field Experiment.” Quarterly Journal of Economics, 123 (2008), 1329–1372.CrossRefGoogle Scholar
Demyanyk, Y., and Van Hemert, O.. “Understanding the Subprime Mortgage Crisis.” Review of Financial Studies, 24 (2011), 1848–1880.CrossRefGoogle Scholar
Di, Z.; Belsky, E.; and Liu, X.. “Do Homeowners Achieve More Household Wealth in the Long Run?” Journal of Housing Economics, 16 (2007), 274–290.CrossRefGoogle Scholar
Einav, L.; Jenkins, M.; and Levin, J.. “Contract Pricing in Consumer Credit Markets.” Econometrica, 80 (2012), 1387–1432.Google Scholar
Fairlie, R. “The Absence of the African-American Owned Business: An Analysis of the Dynamics of Self-Employment.” Journal of Labor Economics, 17 (1999), 80–108.CrossRefGoogle Scholar
Hahn, J.; Todd, P.; and Van der Klaauw, W.. “Identification and Estimation of Treatment Effects with a Regression-Discontinuity Design.” Econometrica, 69 (2001), 201–209.CrossRefGoogle Scholar
Headd, B. “Redefining Business Success: Distinguishing between Closure and Failure.” Small Business Economics, 21 (2003), 51–61.CrossRefGoogle Scholar
Hurst, E., and Lusardi, A.. “Liquidity Constraints, Household Wealth, and Entrepreneurship.” Journal of Political Economy, 112 (2004), 319–347.CrossRefGoogle Scholar
Hurst, E., and Pugsley, B.. “What Do Small Businesses Do?” Brookings Papers on Economic Activity, 43 (2011), 73–142.CrossRefGoogle Scholar
Kaplan, S.; Sensoy, B.; and Strömberg, P.. “Should Investors Bet on the Jockey or the Horse? Evidence from the Evolution of Firms from Early Business Plans to Public Companies.” Journal of Finance, 64 (2009), 75–115.CrossRefGoogle Scholar
Karlan, D., and Morduch, J.. “Access to Finance.” In Handbook of Development Economics, Vol. IV, Rodrik, D. and Rozenzweig, M., eds. Amsterdam: Elsevier Press (2009).Google Scholar
Karlan, D., and Valdivia, M.. “Teaching Entrepreneurship: Impact of Business Training on Microfinance Clients and Institutions.” Review of Economics and Statistics, 93 (2011), 510–527.CrossRefGoogle Scholar
Karlan, D., and Zinman, J.. “Microcredit in Theory and Practice: Using Randomized Credit Scoring for Impact Evaluation.” Science, 332 (2010), 1278–1284.CrossRefGoogle Scholar
Kerr, W., and Nanda, R.. “Democratizing Entry: Banking Deregulations, Financing Constraints, and Entrepreneurship.” Journal of Financial Economics, 94 (2009), 124–149.CrossRefGoogle Scholar
Lowrey, Y. “Startup Business Characteristics and Dynamics: A Data Analysis of the Kauffman Firm Survey.” RAND Working Paper Series WR (2009).CrossRefGoogle Scholar
Matsudaira, J. “Mandatory Summer School and Student Achievement.” Journal of Econometrics, 142 (2008), 829–850.CrossRefGoogle Scholar
McCrary, J. “Manipulation of the Running Variable in the Regression Discontinuity Design: A Density Test.” Journal of Econometrics, 142 (2008), 698–714.CrossRefGoogle Scholar
Melzer, B. “The Real Costs of Credit Access: Evidence from the Payday Lending Market.” Quarterly Journal of Economics, 126 (2011), 517–555.CrossRefGoogle Scholar
Mian, A., and Sufi, A.. “The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis.” Quarterly Journal of Economics, 124 (2009), 1449–1496.CrossRefGoogle Scholar
Morgan, D., and Strain, M.. “Payday Holiday: How Households Fare after Payday Credit Bans.” Staff Report No. 309, Federal Reserve Bank of New York (2008).CrossRefGoogle Scholar
Morse, A. “Payday Lenders: Heroes or Villains?” Journal of Financial Economics, 102 (2011), 28–44.CrossRefGoogle Scholar
Parker, S., and van Praag, C. M.. “Schooling, Capital Constraints, and Entrepreneurial Performance.” Journal of Business & Economic Statistics, 24 (2006), 416–431.CrossRefGoogle Scholar
Robb, A., and Robinson, D.. “The Capital Structure Decisions of New Firms.” Review of Financial Studies, 27 (2014), 153–179.CrossRefGoogle Scholar
Skiba, P., and Tobacman, J.. “Do Payday Loans Cause Bankruptcy?” Working Paper, Vanderbilt University (2011).Google Scholar
Zinman, J. “Restricting Consumer Credit Access: Household Survey Evidence on Effects around the Oregon Rate Cap.” Journal of Banking and Finance, 34 (2010), 546–556.CrossRefGoogle Scholar