Big Loans to Small Businesses: Predicting Winners and Losers in an Entrepreneurial Lending Experiment
Gharad Bryan, Dean Karlan, Adam Osman
American Economic Review · 2024 · Volume 114 · Issue 9
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.
Keywords
Neural Networks and Related Topics, Firm Behavior: Empirical Analysis, Banks, Depository Institutions, Micro Finance Institutions, Mortgages, Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill, Firm Performance: Size, Diversification, and Scope, Entrepreneurship, Economic Development: Financial Markets, Saving and Capital Investment, Corporate Finance and Governance
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