When Microcredit Hurts: Overindebtedness in Times of Uncertainty

The paper asks whether access to credit can harm small businesses during periods of high uncertainty. The authors use a regression discontinuity design that exploits a surprise credit freeze by a microfinance institution at the onset of Chile’s 2020 COVID‑19 shutdown. Comparing borrowers just above and below the cutoff for receiving loans, they document large and persistent negative effects of additional credit on borrowers’ outcomes under these conditions, highlighting the risks of over‑indebtedness when uncertainty is high.