Business

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

G. Bryan, D. Karlan, et al.

Discover how large enterprise loans in Egypt can vastly impact profits, but only for certain entrepreneurs! Researchers Gharad Bryan, Dean Karlan, and Adam Osman reveal the critical misallocation of credit that might hold back promising businesses while others take too much risk. Dive into the insights from their study for a deeper understanding of entrepreneurial dynamics!

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Playback language: English

Index

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 that "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 that existing practice leads to substantial misallocation. We argue that some entrepreneurs are over-optimistic 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.

Publisher

American Economic Review

Published On

Oct 26, 2023

Authors

Gharad Bryan, Dean Karlan, Adam Osman

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