2020
Working Paper
HBS Working Paper Series

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

Format:Print
| Language:English
| Pages:46

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.

Keywords

Financing And Loans; Small Business; Competition; Information; Peru

Citation

Arraiz, Irani, Miriam Bruhn, Benjamin N. Roth, Claudia Ruiz-Ortega, and Rodolfo Stucchi. "Free Riding in Loan Approvals: Evidence From SME Lending in Peru." Harvard Business School Working Paper, No. 20-079, February 2020.