Credit Constraints Research Articles

Does relaxing household credit constraints hurt small business lending? Evidence from a policy change in Texas

This paper studies the relationship between household credit and small business loans using the 1997 liberalization of home equity lending in Texas. First, we build a closed economy general equilibrium model that examines two opposing channels: a negative crowding out effect and a positive collateral effect. Our analysis shows that, following a household credit expansion, the crowding out effect dominates and leads to an overall decline in firm borrowing. We test this result empirically by exploiting the liberalization of home equity loans in Texas. The exogenous increase in household credit brought on by the liberalization results in a crowding out of business lending, as small business loan growth declines by roughly 20 percentage points. This negative effect is dampened in counties that experienced stronger house price growth, providing evidence of a subsidiary collateral effect. We further explore the bank-level factors that could influence the strength of the crowding out effect and find that the effect is weaker for banks with easier access to funding and a specialization in business lending.

Home construction financing and search frictions in the housing market

This paper studies the effects of financial frictions in construction on housing market dynamics. To this end, we build a search-theoretic model of the housing market in which there is endogenous entry of buyers and developers face credit constraints. We capture credit frictions by assuming that developers must search for financing before building a home à la Wasmer and Weil (2004). Our model explores a novel channel that links credit frictions faced by developers to the housing market. We calibrate the model to quantify the size of the credit channel during the 2012–2019 housing market recovery. Through a series of counterfactuals, our model predicts that the credit channel had a large impact on housing liquidity, construction, and the vacancy rate. Furthermore, it accounts for around half of the rise in prices during the 2012-2019 housing market recovery.

Digital Financial Inclusion and Inclusive Growth ––Empirical evidence based on the China Household Panel Survey

As an innovation in traditional inclusive finance, digital inclusive finance is an important way to coordinate the income gap between urban and rural areas, popularize financial products and services, and promote the digitalization process. Therefore, this study matches the digital inclusive finance index with the Chinese household tracking survey, uses a panel data econometric model, a mediation effect model, and a moderation effect model to control for the characteristics of heads of households and families, and explores the impact mechanism of the development of digital inclusive finance on inclusive growth in urban and rural areas in China, with a view to providing a scientific basis and policy suggestions for promoting inclusive growth. The study finds that: First, digital inclusive finance has a significant income-increasing effect on both urban and rural households, among which it has a greater impact on rural households, which is conducive to narrowing the income gap between urban and rural areas; Second, digital inclusive finance improves rural household income and narrows the income gap between urban and rural areas by promoting rural household entrepreneurship and business activities and alleviating the formal credit constraints of rural households; Third, digital inclusive finance can generally promote families with access to the Internet, a strong ability to use digital tools, and small information constraints to start businesses and obtain formal credit. This study innovatively incorporates entrepreneurial quality into the research of the transmission mechanism; three theories of the "digital divide" are put forward and tested. Research value: Clarifying the transmission mechanism of digital inclusive finance to promote inclusive growth, and providing policy suggestions for the development of digital inclusive finance.

Technological Change and Entrepreneurial Activities: Evidence from China

This study is among the first to examine the impacts of technological change on entrepreneurial activities. Using new registered enterprises data and industrial robot data from 2010 to 2018, we find that robot adoption is broadly negatively associated with regional entrepreneurial activities. However, our analysis reveals a more nuanced understanding, in which robot adoption boosts high-quality entrepreneurial activities in regions, specifically those in technology-based industries, but reduces low-quality entrepreneurial activities. We also find that a favorable labor allocation environment and sufficient labor resources, as well as abundant high-skilled labor resources, can mitigate the negative impact. Credit constraints and the upgrading of industrial structures are effective in mitigating the crowding-out effect. In cities with higher unemployment risks, the negative effect is attenuated. The extent of the negative effect varies depending on the prevailing macroeconomic conditions, and the hukou reform helps to mitigate the negative impact. In addition, robot adoption has a significant spatial spillover effect between adjacent cities. These findings shed light on the effects of industrial robot adoption on local entrepreneurial activities, as well as the role of technological change in fostering entrepreneurial activities. Our findings suggest that it is crucial to grasp the strategic opportunities embedded in technological change to spur entrepreneurship.

A Firm of One's Own: Experimental Evidence on Credit Constraints and Occupational Choice

Abstract We evaluate two interventions targeting young women in Nairobi, Kenya. The first is a multifaceted program involving vocational training, in-kind transfers of physical capital, and ongoing mentoring. The second is an unrestricted cash grant. Both interventions shift women into self-employment, and impacts persist after six years. Both programs also increase income in the short-term, but those effects disappear over time. Though the two treatments have similar impacts on labor market outcomes, women in the multifaceted program report significantly higher wellbeing six years after treatment relative to both women in the control group and those who received the grants.

Local credit and international trade

AbstractThis study investigates the relationship between local access to credit and exports. A model of finance‐constrained exporters and bank entry decisions generates trade equations that we estimate with a panel of Brazilian municipal‐level trade and banking data. Literature in the financial development field has struggled to deal with the endogenous relationship between finance and economic outcomes. To untangle this reverse causality, we instrument bank presence by using geographic characteristics particular to the bank branching decision. The results show that local bank access matters: increases in bank branches per person increases bilateral exports and varieties at the city‐ and industry levels. The effect is even stronger for industries where the credit constraint binds, specifically those that use less internal funds and have more difficulty producing collateral.

How Does Digital Inclusive Finance Affect Household Financial Vulnerability?

ABSTRACT Based on the China Health and Retirement Longitudinal Study (CHARLS) three-wave data (2013, 2015, and 2018), this paper constructs a panel Probit model to investigate the impact of digital inclusive finance on household financial vulnerability. The empirical results show that the development of digital inclusive finance can significantly reduce household financial vulnerability. For 1% increase in digital inclusive finance, the probability of household financial vulnerability decreases by 7.0%. The results are robust after addressing endogeneity issues and altering regression models, the dependent variable, and the independent variable. Through the influencing mechanism tests, this paper finds that digital inclusive finance reduces the financial vulnerability of households by reducing credit constraints, promoting entrepreneurship, and increasing risky asset holdings. The heterogeneous effects show that the vulnerability-mitigation effect of digital inclusive finance is more significant in better-educated and younger households and in urban and developed areas.

Factors Influencing Household Debt Structure under Various Credit Constraints

Household debt is a critical component of family financial management, especially considering the prevalence of credit constraints. This study investigates the determinants of Chinese household debt structure, focusing on the choice between formal and informal borrowing and the proportion of formal debt under different credit constraints. Data from the 2018 China Family Panel Studies (CFPS) are analyzed using the bi-probit model. The results indicate that higher levels of household education and internet use significantly enhance the likelihood of accruing formal debt and weaken the tendency to engage in informal debt. This study innovatively employs the KZ index, traditionally used in corporate finance, to assess credit constraints at the household level. This new household credit constraint index demonstrates that the factors affecting the debt structure vary with the level of credit constraints, underscoring the complexity of household financial behaviors in China’s evolving credit landscape.

Fiscal and Monetary Policy Interactions in a Model with Low Interest Rates

We provide a new Keynesian model where entrepreneurs face uninsurable idiosyncratic investment risk and credit constraints. Government bonds provide liquidity services. Multiple steady states with positive values of public debt can be supported for a given permanent deficit-to-output ratio. The steady-state interest rates are lower than the economic growth rate, and public debt contains a bubble component. We analyze the determinacy regions of policy parameter space and find that a large set of monetary and fiscal policy parameters can achieve debt and inflation stability given persistent fiscal deficits both away from and at the zero interest rate lower bound. (JEL E12, E23, E31, E43, E52, E62, H63)

The costs of corporate debt overhang

We make use of rich U.S. data to show that debt overhang significantly reduces firm asset-, capex-, and employee-growth. We show these contractions are likely driven by firm decisions as opposed to the result of credit constraints or changes in investment opportunities. Our measure of overhang – liabilities to cash flow — aligns with traditional theory and focuses on the importance of a firm’s debt servicing capacity. It further allows us to capitalize on the COVID-19 shock as a quasi-natural experiment to confirm the impact of overhang on firm investment and growth.

Estimating the Effects of Credit Constraints on Productivity of Peruvian Agriculture

Estimating the Effects of Credit Constraints on Productivity of Peruvian Agriculture

Credit constraints in higher education attendance: Longitudinal evidence from Ethiopia

AbstractIn this paper, we examine the relationship between household wealth and higher education enrolment, with a focus on the evidence surrounding credit constraints in postsecondary education. Using unique longitudinal data that link household wealth and measures of cognitive ability at age 12 to higher education attendance at age 19–22, we differentiate short‐term credit constraints from long‐term credit constraints and test the relative importance of short‐ and long‐term credit constraints in schooling decisions. We find that short‐ and long‐term credit constraints determine the relationship between household wealth and higher education attendance. There is a need to complement short‐term policies with long‐term interventions that empower households to continue to invest in human capital development over the child's life cycle, which will crystallize in higher cognitive ability and readiness for higher education.

Evaluating the Gendered Credit Constraints and Uptake of an Insurance-Linked Credit Product Among Smallholder Farmers in Kenya

Using data from a multi-arm experiment among maize and bean smallholder farmers in Kenya, we evaluate the gender differences in credit rationing, and whether an insurance-bundled credit product, known as risk-contingent credit (RCC) could enhance credit access for both men and women. Using 3 years of household survey data, we find that female-headed households are significantly more risk-rationed (or demand-side rationed) than men. Post-intervention, we find that the impacts of RCC on credit uptake decisions are significantly larger than those of conventional credit. We also find that RCC impacts do not vary across the different gender categories.

The effect of soaring housing prices on the quality of export products: Evidence from China

AbstractThis paper examines the impact of rising housing prices on the quality of export products. When housing prices increase, the collateral value of firms can rise, easing financial constraints and potentially boosting investment in innovation and product quality. However, higher housing prices can also lead firms to divert investments from their core business operations to the housing sector, where returns are relatively higher. This diversion can negatively affect product quality. We empirically investigate this relationship using Chinese firm‐level data, matched with customs and city‐level data from 2000 to 2013. Our results show that during China's housing boom, rising housing prices significantly reduced the quality of export products. The negative impact of speculative investment in the housing sector outweighed the positive effects of eased credit constraints. Firms with real estate investments and industries with low external financial dependence were more affected by rising housing prices. Additionally, government restrictions on home purchases helped mitigate the negative impact of rising housing prices on export product quality.

Credit allocation and public credit guarantee schemes for small businesses: evidence from Japan

ABSTRACT We investigate the relationship between the use of a public credit guarantee scheme for small businesses and the efficiency of credit allocation using region- and industry-level data from Japan for the period from 1968 to 2005. Because credit constraints are more severe for small businesses than for large firms, a public credit guarantee scheme that mitigates this constraint on small firms’ growth could enhance social welfare. If credit-guaranteed loans are allocated to firms with high value added, a public credit guarantee scheme would enhance the efficiency of credit allocation. Conversely, however, public credit guarantee schemes can squeeze credit allocations for small businesses. When financial institutions offer loans through credit guarantee schemes, the incentives of the financial institutions to monitor the activity of small business borrowers may decline. In addition, because Japan’s public credit guarantee scheme is a component of a broader set of social policies aiming to eliminate inequality, credit-guaranteed loans can be offered to economically distressed firms. In this situation, we identify a negative relationship between the amount of credit guaranteed and value added. We show that Japan’s public credit guarantee schemes reduced the efficiency of credit allocations, with negative implications for industry and regional growth.

Does credit constraint matter for technical efficiency, technological shifts, and profitability of flower growers? An empirical study

Does credit constraint matter for technical efficiency, technological shifts, and profitability of flower growers? An empirical study

Determinants of Credit Constraint among Smallholder Farmers’ Co-Operators in Oyo State, Nigeria

Credit constraint (CC) has been identified as one of the factors that diminish the production efficiency of farmers. Although Multipurpose Cooperative Societies (MCS) have been identified as an avenue to reduce (CC) among farmers, (CC) persists. Thus, the effectiveness of (MCS) in credit delivery and the determinant of (CC) of co-operators were examined. A four-stage sampling procedure was used where Oyo State was purposively selected based on high numbers of registered Agricultural Cooperative Societies. One block was selected from each zone of the four Agricultural Development Project zones. Two cells were randomly selected from each block. Multi-purpose cooperative societies from each of the cells were randomly selected. Co-operators were randomly selected proportionate to size and in all, 200 respondents were randomly selected. Co-operators access credit, inputs, tractors, market information and processed their produce by (MCS). Female co-operators were more credit constraint than their male counterparts. Education, default history farming experience, monthly contributions and dependency ratio were the determinants of credit constraint. Default history has the highest impact in determining credit constraint of co-operators, therefore conscious effort is needed by co-operators to avoid it occurrence. Credits should be made available to farmers through cooperative societies to enhance their efficiency

Mortgage Design, Repayment Schedules, and Household Borrowing

How does the design of debt repayment schedules affect household borrowing? To answer this question, we exploit a Swedish policy reform that eliminated interest-only mortgages for loan-to-value ratios above 50%. We document substantial bunching at the threshold, leading to 5% less borrowing. Wealthy borrowers drive the results, challenging credit constraints as the primary explanation. We develop a model to evaluate the mechanisms driving household behavior and find that much of the effect comes from households experiencing ongoing flow disutility to amortization payments. Our results indicate that new mortgage contracts with low initial payments substantially increase household borrowing and lifetime interest costs.

Does digital credit alleviate household income vulnerability?

As a result of various internal and external risks and unstable expectations, the income vulnerability of households in various countries has come to the forefront, weakening the microfoundation of a stable macroeconomy. However, the booming development of digital credit may create favorable conditions for mitigating household income vulnerability and improving household economic resilience. Using data from the 2014–2020 China Family Panel Studies (CFPS), this paper explores the mechanism of the role of digital credit on household income vulnerability. Firstly, digital credit can help the household sector manage risks, effectively alleviate the credit constraints of the household sector, and mitigate household income vulnerability. Secondly, the development of digital credit mitigates household income vulnerability by promoting the breadth and depth of financial services. Thirdly, the heterogeneity analysis shows that the marginal utility of digital credit is higher for the income vulnerability of self-employed households, low-income disadvantaged households, and households in underdeveloped regions. Fourthly, the shock of the COVID-19 pandemic and the implementation of entrepreneurship assistance policies weakened digital credit's alleviation of household income vulnerability.

FinTech and rural household entrepreneurship

Entrepreneurship activities play an important role in economic growth and job creation. Based on China Family Panel Studies (CFPS) survey data in 2014, 2016, 2018 and 2020, and combing it with the financial technology (FinTech) Index, this study explores the impact of FinTech on rural household entrepreneurship using the Logit and IV estimations. The empirical findings highlight the significant role of FinTech in promoting rural household entrepreneurship. The mechanism analysis shows that FinTech positively modulates the relationship between formal finance and rural credit constraints, thereby fostering rural entrepreneurship. Notably, the impact of FinTech on entrepreneurship is particularly pronounced in areas with lower urbanization levels, indicating a greater potential for promoting entrepreneurship in less economically developed regions. Therefore, this study recommends expanding the coverage of FinTech to encourage rural household entrepreneurship and accelerate efforts towards rural revitalization.