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Self-selection and discrimination in credit markets

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  • Stanley D. Longhofer
  • Stephen R. Peters
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    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.

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    File URL: http://www.clevelandfed.org/research/workpaper/1998/Wp9809.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9809.

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    Date of creation: 1998
    Date of revision:
    Handle: RePEc:fip:fedcwp:9809

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    Keywords: Mortgages ; Discrimination in consumer credit;

    This paper has been announced in the following NEP Reports:

    References

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    1. David Horne, 1997. "Mortgage Lending, Race, and Model Specification," Journal of Financial Services Research, Springer, vol. 11(1), pages 43-68, February.
    2. 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.
    3. HAROLD Black & M. Collins & Ken Cyree, 1997. "Do Black-Owned Banks Discriminate against Black Borrowers?," Journal of Financial Services Research, Springer, vol. 11(1), pages 189-204, February.
    4. Alicia H. Munnell, 1992. "Mortgage lending in Boston: interpreting HMDA data," Working Papers 92-7, Federal Reserve Bank of Boston.
    5. Geoffrey M.B. Tootell, 1993. "Defaults, denials, and discrimination in mortgage lending," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 45-51.
    6. 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.
    7. Avery, Robert B & Beeson, Patricia E & Sniderman, Mark S, 1996. "Posted Rates and Mortgage Lending Activity," The Journal of Real Estate Finance and Economics, Springer, vol. 13(1), pages 11-26, July.
    8. Stanley D. Longhofer, 1996. "Cultural affinity and mortgage discrimination," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 12-24.
    9. Robert B. Avery & Patricia E. Beeson & Mark S. Sniderman, 1994. "Cross-lender variation in home mortgage lending," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 12-29.
    10. Eric Rosenblatt, 1997. "A Reconsideration Of Discrimination In Mortgage Underwriting With Data From A National Mortgage Bank," Journal of Financial Services Research, Springer, vol. 11(1), pages 109-131, February.
    11. 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 634-74, August.
    12. 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.
    13. Coate, S. & Loury, G.C., 1992. "Will Affirmative Action Policies Eliminate Negative Stereotypes?," Papers 3, Boston University - Department of Economics.
    14. James J. Heckman, 1998. "Detecting Discrimination," Journal of Economic Perspectives, American Economic Association, vol. 12(2), pages 101-116, Spring.
    15. Paul R. Milgrom, 1979. "Good Nevs and Bad News: Representation Theorems and Applications," Discussion Papers 407R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    16. James A. Berkovec & Glenn B. Canner & Stuart A. Gabriel & Timothy H. Hannan, 1994. "Race, redlining, and residential mortgage loan performance," Proceedings, Federal Reserve Bank of Philadelphia, pages 263-298.
    17. William C. Hunter & Mary Beth Walker, 1995. "The cultural affinity hypothesis and mortgage lending decisions," Working Paper Series, Issues in Financial Regulation 95-8, Federal Reserve Bank of Chicago.
    18. Paul Calem & Michael Stutzer, 1995. "The simple analytics of observed discrimination in credit markets," Working Papers 95-7, Federal Reserve Bank of Philadelphia.
    19. Duca, John V & Rosenthal, Stuart S, 1994. "Do Mortgage Rates Vary Based on Household Default Characteristics? Evidence on Rate Sorting and Credit Rationing," The Journal of Real Estate Finance and Economics, Springer, vol. 8(2), pages 99-113, March.
    20. Berkovec, James A, et al, 1994. "Race, Redlining, and Residential Mortgage Loan Performance," The Journal of Real Estate Finance and Economics, Springer, vol. 9(3), pages 263-94, November.
    21. 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, vol. 11(1), pages 153-168, February.
    22. Cornell, Bradford & Welch, Ivo, 1996. "Culture, Information, and Screening Discrimination," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 542-71, June.
    23. Phelps, Edmund S, 1972. "The Statistical Theory of Racism and Sexism," American Economic Review, American Economic Association, vol. 62(4), pages 659-61, September.
    24. 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.
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    Cited by:
    1. Song Han, 2002. "On the economics of discrimination in credit markets," Finance and Economics Discussion Series 2002-2, Board of Governors of the Federal Reserve System (U.S.).
    2. 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.

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