Financial literacy and borrower discouragement

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.