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    Free Riding in Loan Approvals: Evidence From SME Lending in Peru
    24 Mar 2020Working Paper Summaries

    Free Riding in Loan Approvals: Evidence From SME Lending in Peru

    by Irani Arraiz, Miriam Bruhn, Benjamin N. Roth, Claudia Ruiz-Ortega, and Rodolfo Stucchi
    Using data from a large Peruvian bank trying to expand credit access to small and medium enterprises, this study shows that competing lenders use one another’s loan approvals as an input into their own approval process. Such “free riding” has great impact on market outcomes and might warrant policy intervention.
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    Author Abstract

    We provide evidence that commercial lenders in Peru free ride off their peer’s screening efforts. Leveraging a discontinuity in the loan approval process of a large bank, we find competing lenders responded to additional loan approvals by issuing approvals of their own. Competing lenders captured almost three quarters of the new loans to previously financially excluded borrowers. Importantly, many of these borrowers never took a loan from our partner bank, even after our partner bank approved them. Lenders may therefore underinvest in screening new borrowers and expanding financial inclusion, as their competitors reap some of the benefit. Our results highlight that information spillovers between lenders may operate outside of credit registries.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: February 2020
    • HBS Working Paper Number: HBS Working Paper #20-079
    • Faculty Unit(s): Entrepreneurial Management
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    Benjamin N. Roth
    Benjamin N. Roth
    Assistant Professor of Business Administration
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