Financing successful small business projects
Purpose – The current credit rationing strongly influences the viability of SMEs innovation projects. In this context, the practice of screening borrowers by project success probability has become a paramount consideration for both lenders and firms. The aim of this paper is to test the screening role of loan contracts that consider collateral-interest margins simultaneously. Design/methodology/approach – This paper presents an empirical analysis that uses a unique data set composed of 323 bank loans granted by 28 banks to SMEs backed by a Spanish Mutual Guarantee Institution. Findings – The results show that appropriate combinations of collateral and interest rates can distinguish between…
Entrepreneurship and Credit Rationing: How to Screen Successful Projects in this Current Crisis Period
The current credit rationing heavily influences entrepreneurship and, more dramatically, the viability of innovation projects. In this context, mechanisms to screen successful projects are of paramount importance for both lenders and entrepreneurs. We present an experiment to test the collateral-interest mechanism of credit screening. Our results confirm that incentive-compatible pairs of collateral-interest rate can distinguish between projects of different success probability, even in moral hazard settings.
Institutional factors affecting entrepreneurship: A QCA analysis
A country's institutional framework plays a crucial role in promoting entrepreneurship, which drives economic growth. Encouraging a minimum level of certainty in ambiguous environments characterized by risk taking is important. Aware of this importance, we analyze the influence of institutional factors on entrepreneurship development. Specifically, we analyze political stability, government effectiveness, regulatory quality, a robust rule of law, the ease of starting a new business, and the ease of obtaining credit. We develop two models to explain the presence and absence of entrepreneurship. To do so, we apply qualitative comparative analysis (QCA) to a sample of 48 countries using data s…
Gender Behavioral Issues and Entrepreneurship
Women, despite the fact that they make up around 50% of the world’s population, own and manage significantly fewer businesses than men worldwide. Previous empirical research indicates that the gender gap in entrepreneurial propensity mainly comes from subjective perceptions as self-confidence in one’s own skills and fear of failure, and from women’s lower exposure to other entrepreneurs. In this chapter we present laboratory economic experiments that study, under controlled conditions, subjective perceptions of women and men that seem to affect entrepreneurial propensity. The results of the reviewed experiments indicate that correcting factors such as self-confidence is possible (due to its…
The role of «perceived loss» aversion on credit screening: an experiment
A major characteristic of credit markets is information asymmetry.To combat its problems, as credit rationing, principals can use a menu of contracts to screen clients with different risk level. We conduct a laboratory experiment to address an important question for such settings —does the framing of the offered menu of contracts interfere with the self-selection mechanism? The answer is yes. We find subjects' choices shift when the same (positive) outcomes of the same menu of contracts are presented in two different frames. Subjects exhibit loss aversion in their perception of the positive outcomes below the reference point, and self-selection fails to occur. Uno de los mayores problemas a…
The paradox of (Inter)net neutrality: An experiment on ex-ante antitrust regulation✰
Abstract Net neutrality has been the most relevant and heavily debated Internet regulation policy of the last decade. Net neutrality aims to prohibit discrimination between data packages in terms of content, origin, destination, or type of equipment used. However, the Big Tech companies, sheltered by the net neutrality policy, have flourished. They now have the power to exclude minor companies, and therefore their contents, from the Internet market in de facto defiance of the net neutrality principle. Academic results regarding this net neutrality paradox are still ambiguous. To represent the current Internet market distortions and analyze a potential tool to adjust and strengthen the net n…
Rational Herding in Reward-Based Crowdfunding: An MTurk Experiment.
Crowdfunding is gaining popularity as a way of financing social sustainable initiatives. We performed a controlled economic experiment in MTurk by simulating a crowdfunding platform and developed a theoretical model that rationalizes herding behavior. The experiment was designed to test and quantify the causal effects of revealing specific information to prospective backers: (i) the number of early contributors already financing the project and (ii) positive opinions of other backers versus those of experts. The results show that early contributions to the campaign and positive opinions of peers act as a reinforcing signal to potential backers and affect backers&rsquo
Statistical formats to optimize evidence-based decision making: A behavioral approach
Abstract Statistical information is crucial for managerial decision making. The decision-making literature in psychology and mathematical cognition documents how different statistical formats can facilitate certain types of decisions. The present analysis is the first of its kind to assess the impact of statistical formats in the presentation of data from market research on both the optimality of market decisions and the time required to perform the decision-making process. An economic experiment provides the data for this study. The experiment presents statistical information in simple frequencies and relative frequencies using numerical and pictorial representations in the context of diff…
Are credit screening contracts designed for men?
AbstractAccess to credit is key to succeed in business. Theoretical models of credit under asymmetric information classify borrowers and grant or deny credit, typically based on incentive-compatible contracts with collateral. However, if women are particularly risk averse, female borrowers may be wrongly classified and denied credit. We conduct in three countries a laboratory experiment to study this systematic gender difference. Results show that incentive-compatible contracts with collateral fail to disclose women’s private information, while disclosing men’s private information. We suggest that banks should incorporate the gender difference in risk attitudes to avoid the glass ceiling in…
Information acquisition in SME's relationship lending and the cost of loans
Abstract This study analyzes the effect of the reputation SMEs get in a relationship lending on the cost of next loans. A unique dataset of 734 Spanish SMEs' relationship lending provides information on a loan-by-loan basis about the ex post previous loan performance, which measures reputation. No prior empirical research differentiates the cost of loans following a defaulted loan from the costs of those following a successfully repaid loan. Results show that lenders obtain information about borrowers' risk-level during relationship lending and use this information. Loans granted after a successful one pledge significantly lower collateral and interest rate than loans granted after a defaul…
The Separating Role of Collateral Requirements in Credit Markets with Asymmetric Information
In this paper we test Bester's (1985, 1987) prediction about the separating role of contracts that involve both interest rates and collateral requirements in credit markets. To test this prediction we use data from natural credit markets and controlled experiments. Using a sample of credits to small and medium size firms in Valencia, Spain, we relate two different types of contracts with the ex post risk type of the borrower and other relevant variables. We then design two incentive compatible contracts and analyze decisions under two different experimental treatments, one with moral hazard. Our empirical results confirm that borrowers of ex post lower risk choose contracts with higher coll…
Dealing with risk: Gender, stakes, and probability effects
This paper investigates how subjects deal with financial risk, both "upside" (with a small chance of a high payoff) and "downside" (with a small chance of a low payoff). We find that the same people who avoid risk in the downside setting tend to make more risky choices in the upside one. The experiment is designed to disentangle the probability-weighting and utility-curvature components of risk attitudes, and to differentiate settings in which gender differences arise from those in which they do not. Women are more risk averse for downside risks, but gender differences are diminished for upside risks.
Risk aversion in prediction markets: A framed-field experiment
International audience; To make better decisions today, companies and other economic agents are interested in getting accurate predictions of future events. Prediction markets can, at least potentially, give those accurate forecasts for the probability of the event by aggregating information from traders. However, formal studies highlight that the risk attitudes of market participants may bias the market equilibrium prices, and consequently make the prediction unreliable. This research examines the effect of participants' risk attitudes on prediction market prices, through a framed field experiment on the two semifinals at the 2015 NCAA Men's Division Basketball Tournament. The results of t…
Toward Value Co-Creation: Increasing Women’s Presence in Management Positions through Competition against a Set Target
Despite empirical evidence that women’s presence in management positions is a source of value co-creation for firms, these positions are still male-dominated. Some evidence from experimental economics suggests that one reason for this imbalance is that women shy away from competition. However, most of these studies have focused on competition systems that pit individuals against each other. We present an economic laboratory experiment that compares competition against others with competition against a set target. The crucial difference is that whereas the former involves competing against opponents, the latter does not. Our results show that significantly more women are willing to compete a…
Gender, self-confidence, sports, and preferences for competition
In the last years, research in economics has shown a gender gap in the willingness to compete with women shying away from competition more than men do. This gender difference in preferences towards competition has been considered a critical factor in explaining the small percentage of women found in top-level positions in business, science, or politics. Therefore, in order to improve women job prospects, research and policy interventions try to offer incentives for women to increase competitive behavior. However, other recent studies specifically point at men¿s competitive behavior as the responsible for some of the financial markets malfunctions, suggesting that an influx of talented women…