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A Structural Econometric Model of Price Discrimination in the Mortgage Lending Industry

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  • Gary-Bobo, Robert J.
  • Larribeau, Sophie

Abstract

We propose a model of discrimination in the market for mortgages. The model explains accepted loan applications and determines loan sizes and interest rates simultaneously. A competitive and a discriminating monopoly version of the model are proposed. Offered interest rates and loan sizes are a function of observable borrower characteristics. The competitive model rests on a marginal condition, reflecting contract optimality, to which a zero-profit condition is added. In contrast, the discriminating monopoly maximizes profits under a borrower participation constraint, reflecting the availability of a rental market as an outside option. Each version of the model is a bivariate, non-linear model, and is estimated by standard maximum likelihood methods. The data used for estimation is a sample of clients of a French network of mortgage lenders. We show the presence of ‘social discrimination’ in the data, the loan conditions depending, not only on the borrower's wage and down payment, but also on the borrower's occupational status. Abnormally high-risk premia in the competitive version of the model suggest the presence of market power, justifying an attempt at estimating its monopolistic version. The discriminating monopoly model estimates show that the borrowers' price-elasticity of demand for housing varies with occupational status, and is inversely related with the lender's interest rate markups. This confirms that the lender exploits structural differences in the preferences to discriminate, as predicted by standard theories.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3302.

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Date of creation: Apr 2002
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Handle: RePEc:cpr:ceprdp:3302

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Keywords: discriminating monopoly; mortgage loans; price discrimination;

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References

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  1. Alicia H. Munnell, 1992. "Mortgage lending in Boston: interpreting HMDA data," Working Papers 92-7, Federal Reserve Bank of Boston.
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  15. Brueckner, Jan K, 2000. "Mortgage Default with Asymmetric Information," The Journal of Real Estate Finance and Economics, Springer, vol. 20(3), pages 251-74, May.
  16. Phillip Leslie, 2004. "Price Discrimination in Broadway Theater," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 520-541, Autumn.
  17. Calem Paul & Stutzer Michael, 1995. "The Simple Analytics of Observed Discrimination in Credit Markets," Journal of Financial Intermediation, Elsevier, vol. 4(3), pages 189-212, July.
  18. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
  19. Brueckner Jan K., 1994. "Borrower Mobility, Adverse Selection, and Mortgage Points," Journal of Financial Intermediation, Elsevier, vol. 3(4), pages 416-441, September.
  20. Helen F. Ladd, 1998. "Evidence on Discrimination in Mortgage Lending," Journal of Economic Perspectives, American Economic Association, vol. 12(2), pages 41-62, Spring.
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Cited by:
  1. DeFusco, Anthony & Paciorek, Andrew D., 2014. "The Interest Rate Elasticity of Mortgage Demand: Evidence From Bunching at the Conforming Loan Limit," Finance and Economics Discussion Series 2014-11, Board of Governors of the Federal Reserve System (U.S.).
  2. Hans Degryse & Steven Ongena, 2002. "Distance, Lending Relationships, and Competition," CSEF Working Papers 80, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. Gary-Bobo, Robert J. & Larribeau, Sophie, 2003. "The Bank's Market Power and the Interest Rate Elasticity of Demand for Housing: An Econometric Study of Discrimination on French Mortgage Data," CEPR Discussion Papers 3745, C.E.P.R. Discussion Papers.
  4. Michiel van Leuvensteijn & Wolter Hassink, 2003. "Price-setting and price dispersion in the Dutch mortgage market," CPB Discussion Paper 21, CPB Netherlands Bureau for Economic Policy Analysis.

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