A Structural Econometric Model of Price Discrimination in the Mortgage Lending Industry
AbstractWe 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3302.
Date of creation: Apr 2002
Date of revision:
Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
Other versions of this item:
- Robert Gary-Bobo & Sophie Larribeau, 2002. "A Structural Econometric Model of Price Discrimination in the Mortgage Lending Industry," CESifo Working Paper Series 739, CESifo Group Munich.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alicia H. Munnell, 1992.
"Mortgage lending in Boston: interpreting HMDA data,"
92-7, Federal Reserve Bank of Boston.
- Munnell, Alicia H. & Geoffrey M. B. Tootell & Lynn E. Browne & James McEneaney, 1996. "Mortgage Lending in Boston: Interpreting HMDA Data," American Economic Review, American Economic Association, vol. 86(1), pages 25-53, March.
- Hellmuth Milde & John G. Riley, 1986.
"Signalling in Credit Markets,"
UCLA Economics Working Papers
334, UCLA Department of Economics.
- Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
- Eugenio J. Miravete, 2002.
"Estimating Demand for Local Telephone Service with Asymmetric Information and Optional Calling Plans,"
Review of Economic Studies,
Oxford University Press, vol. 69(4), pages 943-971.
- Miravete, Eugenio J, 2002. "Estimating Demand for Local Telephone Service with Asymmetric Information and Optional Calling Plans," Review of Economic Studies, Wiley Blackwell, vol. 69(4), pages 943-71, October.
- Miravete, Eugenio J, 2000. "Estimating Demand for Local Telephone Service with Asymmetric Information and Optional Calling Plans," CEPR Discussion Papers 2635, C.E.P.R. Discussion Papers.
- Armstrong, Mark, 1999.
"Price Discrimination by a Many-Product Firm,"
Review of Economic Studies,
Wiley Blackwell, vol. 66(1), pages 151-68, January.
- Armstrong, M., 1996. "Price discrimination by a many-product firm," Discussion Paper Series In Economics And Econometrics 9628, Economics Division, School of Social Sciences, University of Southampton.
- Bousquet, Alain & Ivaldi, Marc, 1997. "Optimal pricing of telephone usage: An econometric implementation," Information Economics and Policy, Elsevier, vol. 9(3), pages 219-239, September.
- Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September.
- Goldberg, Pinelopi Koujianou & Verboven, Frank, 2001.
"The Evolution of Price Dispersion in the European Car Market,"
Review of Economic Studies,
Wiley Blackwell, vol. 68(4), pages 811-48, October.
- Pinelopi Koujianou Goldberg & Frank Verboven, 1998. "The Evolution of Price Dispersion in the European Car Market," NBER Working Papers 6818, National Bureau of Economic Research, Inc.
- Goldberg, Pinelopi Koujianou & Verboven, Frank, 1998. "The Evolution of Price Dispersion in the European Car Market," CEPR Discussion Papers 2029, C.E.P.R. Discussion Papers.
- Pierre-André Chiappori & Jean Pinquet, 1999.
"L'assurance-chômage des emprunteurs,"
Revue Française d'Économie,
Programme National Persée, vol. 14(1), pages 91-115.
- Chiappori, P.A. & Pinquet, J., 1999. "Assurance chomage des emprunteurs," Papers 99-01, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
- P.-A. Chiappori & J. Pinquet, 1999. "Assurance chômage des emprunteurs," THEMA Working Papers 99-01, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
- James A. Berkovec & Glenn B. Canner & Stuart A. Gabriel & Timothy H. Hannan, 1998. "Discrimination, Competition, And Loan Performance In Fha Mortgage Lending," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 241-250, May.
- Marc IVALDI & David MARTIMORT, 1994.
"Competition under Nonlinear Pricing,"
Annales d'Economie et de Statistique,
ENSAE, issue 34, pages 71-114.
- Cavalluzzo, Ken S & Cavalluzzo, Linda C, 1998. "Market Structure and Discrimination: The Case of Small Businesses," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 771-92, November.
- Paul Calem & Michael Stutzer, 1995. "The simple analytics of observed discrimination in credit markets," Working Papers 95-7, Federal Reserve Bank of Philadelphia.
- Phelps, Edmund S, 1972. "The Statistical Theory of Racism and Sexism," American Economic Review, American Economic Association, vol. 62(4), pages 659-61, September.
- 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.
- Phillip Leslie, 2004. "Price Discrimination in Broadway Theater," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 520-541, Autumn.
- 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.
- Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
- Brueckner Jan K., 1994. "Borrower Mobility, Adverse Selection, and Mortgage Points," Journal of Financial Intermediation, Elsevier, vol. 3(4), pages 416-441, September.
- Helen F. Ladd, 1998. "Evidence on Discrimination in Mortgage Lending," Journal of Economic Perspectives, American Economic Association, vol. 12(2), pages 41-62, Spring.
- Chari, V V & Jagannathan, Ravi, 1989. " Adverse Selection in a Model of Real Estate Lending," Journal of Finance, American Finance Association, vol. 44(2), pages 499-508, June.
- 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.).
- 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.
- Degryse, H.A. & Ongena, S., 2003. "Distance, Lending Relationships, and Competition," Discussion Paper 2003-123, Tilburg University, Center for Economic Research.
- Degryse, H.A. & Ongena, S., 2002. "Distance, Lending Relationships and Competition," Discussion Paper 2002-16, Tilburg University, Center for Economic Research.
- 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.
- Robert J. GARY-BOBO & Sophie LARRIBEAU, 2003. "The Bank's Market Power and the Interest-Rate Elasticity of Demand for Housing: An Econometric Study of Discrimination on French Mortgage Data," Annales d'Economie et de Statistique, ENSAE, issue 71-72, pages 377-398.
- 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.
- W.H.J. Hassink & M. van Leuvensteijn, 2003. "Price-setting and Price Dispersion in the Dutch Mortgage Market," Working Papers 03-07, Utrecht School of Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.