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Discrimination in Lending: Theory and Evidence

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  • Song Han

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Abstract

Using a general equilibrium model of credit market discrimination, I find that both taste-based discrimination and statistical discrimination have similar predictions for the intergroup differences in loan terms. The commonly held view has been that if taste-based discrimination exists, loans approved to minority borrowers will have higher expected profitability than those to majorities with comparable credit background. I show that the validity of this profitability view depends crucially on how expected loan profitability is measured. I also show that taste-based discrimination must exist if loans to minority borrowers have higher expected rates of return or lower expected rates of default loss than those to majorities with the same exogenous characteristics observed by lender at the time of loan originations. My analysis suggests that the valid method to test for taste-based discrimination should be reduced-form regressions. Empirically, I fail to find supporting evidence for the existence of taste-based discrimination.

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Bibliographic Info

Article provided by Springer in its journal The Journal of Real Estate Finance and Economics.

Volume (Year): 29 (2004)
Issue (Month): 1 (07)
Pages: 5-46

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Handle: RePEc:kap:jrefec:v:29:y:2004:i:1:p:5-46

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Web page: http://www.springerlink.com/link.asp?id=102945

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Cited by:
  1. Thorsten Beck & Patrick Behr & Andreas Madestam, 2011. "Sex and Credit: Is There a Gender Bias in Lending?," Working Papers 411, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Beck, T.H.L. & Behr, P. & Madestam, A., 2011. "Sex and Credit: Is There a Gender Bias in Microfinance?," Discussion Paper 2011-101, Tilburg University, Center for Economic Research.
  3. Song Han, 2011. "Creditor Learning and Discrimination in Lending," Journal of Financial Services Research, Springer, vol. 40(1), pages 1-27, October.
  4. Isabelle Agier & Ariane Szafarz, 2011. "Credit to Women Entrepreneurs: The Curse of the Trustworthier Sex," Working Papers CEB 11-005, ULB -- Universite Libre de Bruxelles.
  5. James Kau & Donald Keenan & Henry Munneke, 2012. "Racial Discrimination and Mortgage Lending," The Journal of Real Estate Finance and Economics, Springer, vol. 45(2), pages 289-304, August.
  6. Stephen L. Ross, 2003. "What Is Known about Testing for Discrimination: Lessons Learned by Comparing across Different Markets," Working papers 2003-21, University of Connecticut, Department of Economics, revised Nov 2003.
  7. Stephen L. Ross, 2005. "The Continuing Practice and Impact of Discrimination," Working papers 2005-19, University of Connecticut, Department of Economics, revised Jul 2006.

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