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Credit Standards and Segregation

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  • Ouazad, Amine
  • Rancière, Romain

Abstract

How do credit standards on the mortgage market affect neighbourhood choice and the resulting level of urban segregation? To answer this question, we first develop a model of neighbourhood choice with credit constraints. The model shows that a relaxation of credit standards can either increase or decrease segregation, depending on racial income gaps and on races' preferences for neighbourhoods. We then estimate the effect of the relaxation of credit standards that accompanied the 1995-2006 mortgage credit boom on the level of school segregation. Census tract racial composition is strongly correlated with the racial composition of the 10 closest schools in the cross section. Matching a national data set of mortgage originations with annual racial demographics of each of the public schools in the United States from 1995 to 2006, we find that the relaxation of credit standards has caused an increase in the segregation of blacks through a lower exposure of blacks to Hispanics and whites.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8300.

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Date of creation: Mar 2011
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Handle: RePEc:cpr:ceprdp:8300

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Keywords: lending standards; mortgage; segregation;

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  1. Clotfelter, Charles T., 1998. "Public School Segregation in Metropolitan Areas," Working Papers 98-12, Duke University, Department of Economics.
  2. David Card & Jesse Rothstein, 2005. "Racial Segregation and the Black-White Test Score Gap," Working Papers 879, Princeton University, Department of Economics, Industrial Relations Section..
  3. Jean Imbs & Giovanni Favara, 2011. "Credit Supply and the Price of Housing," 2011 Meeting Papers 1342, Society for Economic Dynamics.
  4. Goux, Dominique & Maurin, Eric, 2006. "Close Neighbours Matter: Neighbourhood Effects on Early Performance at School," CEPR Discussion Papers 5682, C.E.P.R. Discussion Papers.
  5. Ryo Nakajima, 2007. "Measuring Peer Effects on Youth Smoking Behaviour," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 897-935.
  6. Cutler, David & Vigdor, Jacob & Glaeser, Edward, 1999. "The Rise and Decline of the American Ghetto," Scholarly Articles 2770033, Harvard University Department of Economics.
  7. Shubham Chaudhuri & Rajiv Sethi, 2008. "Statistical Discrimination with Peer Effects: Can Integration Eliminate Negative Stereotypes?," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 579-596.
  8. repec:bla:restud:v:75:y:2008:i:2:p:579-596 is not listed on IDEAS
  9. Kramarz, Francis & Machin, Stephen & Ouazad, Amine, 2008. "What Makes a Test Score? The Respective Contributions of Pupils, Schools, and Peers in Achievement in English Primary Education," IZA Discussion Papers 3866, Institute for the Study of Labor (IZA).
  10. Dell''Ariccia, Giovanni & Igan, Deniz & Laeven, Luc, 2008. "Credit Booms and Lending Standards: Evidence From The Subprime Mortgage Market," CEPR Discussion Papers 6683, C.E.P.R. Discussion Papers.
  11. repec:bla:restud:v:74:y:2007:i:3:p:897-935 is not listed on IDEAS
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