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Self-selection and discrimination in credit markets

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  • Stanley D. Longhofer
  • Stephen R. Peters

Abstract

This paper increases understanding of the causes and consequences of discrimination in credit markets. It develops an underwriting model in which lenders use a simple Bayesian updating process to evaluate applicant creditworthiness. It also models individuals' self-selection behavior to show how market frictions can affect application decisions.

Suggested Citation

  • Stanley D. Longhofer & Stephen R. Peters, 1998. "Self-selection and discrimination in credit markets," Working Papers (Old Series) 9809, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:9809
    DOI: 10.26509/frbc-wp-199809
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    References listed on IDEAS

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    1. David Horne, 1997. "Mortgage Lending, Race, and Model Specification," Journal of Financial Services Research, Springer;Western Finance Association, vol. 11(1), pages 43-68, February.
    2. Becker, Gary S., 1971. "The Economics of Discrimination," University of Chicago Press Economics Books, University of Chicago Press, edition 2, number 9780226041162, September.
    3. Becker, Gary S, 1993. "Nobel Lecture: The Economic Way of Looking at Behavior," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 385-409, June.
    4. Coate, Stephen & Loury, Glenn, 1993. "Antidiscrimination Enforcement and the Problem of Patronization," American Economic Review, American Economic Association, vol. 83(2), pages 92-98, May.
    5. Calomiris, Charles W & Kahn, Charles M & Longhofer, Stanley D, 1994. "Housing-Finance Intervention and Private Incentives: Helping Minorities and the Poor," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 634-674, August.
    6. Stanley D. Longhofer, 1996. "Cultural affinity and mortgage discrimination," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 12-24.
    7. Day, Theodore E & Liebowitz, S J, 1998. "Mortgage Lending to Minorities: Where's the Bias?," Economic Inquiry, Western Economic Association International, vol. 36(1), pages 3-28, January.
    8. Louis S. Jacobson & Robert J. Lalonde & Daniel G. Sullivan, 1994. "At Home," Challenge, Taylor & Francis Journals, vol. 37(1), pages 56-56, January.
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    11. Kenneth Arrow, 1971. "The Theory of Discrimination," Working Papers 403, Princeton University, Department of Economics, Industrial Relations Section..
    12. 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.
    13. 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.
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    16. Michael Ferguson & Stephen Peters, 1997. "Cultural Affinity and Lending Discrimination: The Impact of Underwriting Errors and Credit Risk Distribution on Applicant Denial Rates," Journal of Financial Services Research, Springer;Western Finance Association, vol. 11(1), pages 153-168, February.
    17. James J. Heckman, 1998. "Detecting Discrimination," Journal of Economic Perspectives, American Economic Association, vol. 12(2), pages 101-116, Spring.
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    19. Cornell, Bradford & Welch, Ivo, 1996. "Culture, Information, and Screening Discrimination," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 542-571, June.
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    21. Hunter, William C & Walker, Mary Beth, 1996. "The Cultural Affinity Hypothesis and Mortgage Lending Decisions," The Journal of Real Estate Finance and Economics, Springer, vol. 13(1), pages 57-70, July.
    22. Phelps, Edmund S, 1972. "The Statistical Theory of Racism and Sexism," American Economic Review, American Economic Association, vol. 62(4), pages 659-661, September.
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    25. HAROLD Black & M. Collins & Ken Cyree, 1997. "Do Black-Owned Banks Discriminate against Black Borrowers?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 11(1), pages 189-204, February.
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    Citations

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    Cited by:

    1. Judith A. Giles & Marsha J. Courchane, 2000. "Stratified Sample Design for Fair Lending Binary Logit Models," Econometrics Working Papers 0007, Department of Economics, University of Victoria.
    2. Vani K. Borooah & John Mangan, 2007. "Love Thy Neighbour: How Much Bigotry Is There In Western Countries?," Kyklos, Wiley Blackwell, vol. 60(3), pages 295-317, August.
    3. Song Han, 2001. "On the Economics of Discrimination in Credit Markets," Finance and Economics Discussion Series 2002-02, Board of Governors of the Federal Reserve System (U.S.).
    4. Song Han, 2004. "Discrimination in Lending: Theory and Evidence," The Journal of Real Estate Finance and Economics, Springer, vol. 29(1), pages 5-46, July.

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    Keywords

    Mortgages; Discrimination in consumer credit;

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