Financial literacy and borrower discouragement

• Published in: Economics letters Vol. 243; p. 111898
• Main Authors: Aristei, David, Gallo, Manuela, Minetti, Raoul
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-10-2024
• Subjects: Borrower discouragement; Financial literacy; Micro-enterprises; Self-rationing; Financial literacy; Self-rationing; Borrower discouragement; G53; G30; G41; G32; Micro-enterprises
• ISSN: 0165-1765
• DOI: 10.1016/j.econlet.2024.111898

•We assess the impact of financial literacy on borrower discouragement among Italian micro-enterprises.•Financially illiterate entrepreneurs are more likely to be discouraged from applying for credit.•Financial literacy alleviates self-rationing and contributes to reduce credit market imperfections.•Our results are robust to several sensitivity checks, including accounting for potential endogeneity.
This study provides first empirical evidence on the impact of entrepreneurs’ financial literacy on borrower discouragement. Using novel survey data on Italian micro-enterprises, we find that less financially knowledgeable entrepreneurs are more likely to be discouraged from applying for new financing, especially due to higher application costs. Our results are robust to several sensitivity checks, including accounting for potential endogeneity. Furthermore, we show that the observed self-rationing mechanism is rather inefficient, suggesting that financial literacy might play a key role in reducing credit market imperfections.