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Credit, Income, and Inequality

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Abstract
Access to credit plays a central role in shaping economic opportunities of households and businesses. Access to credit also plays a crucial role in helping an economy successfully exit from the pandemic doldrums. The ability to get a loan may allow individuals to purchase a home, invest in education and training, or start and then expand a business. Hence access to credit has important implications for upward mobility and potentially also for inequality. Adverse selection and moral hazard problems due to asymmetric information between lenders and borrowers affect credit availability. Because of these information issues, lenders may limit credit or post higher lending rates and often require borrowers to pledge collateral. Consequently, relatively poor individuals with limited capital endowment may experience credit denial, irrespective of the quality of their investment ideas. As a result, their exclusion from credit access can hinder economic mobility and entrench income inequality. In this post, we describe the results of our recent paper which contributes to the understanding of this mechanism.

Suggested Citation

  • Manthos D. Delis & Fulvia Fringuellotti & Steven Ongena, 2021. "Credit, Income, and Inequality," Liberty Street Economics 20210701, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:92835
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    File URL: https://libertystreeteconomics.newyorkfed.org/2021/07/credit-income-and-inequality.html
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    Citations

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    Cited by:

    1. Makuluni Fatso E. & Dunga Hannah Mayamiko, 2022. "The Impact of Access to Credit on Welfare Inequality in Malawi," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 67(2), pages 50-66, August.

    More about this item

    Keywords

    credit constraints; income; business loans; economic mobility; income inequality; regression discontinuity design;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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