Do Credit Market Barriers Exist for Minority and Women Entrepreneurs?
AbstractThis paper examines whether methodological deficiencies in the literature on discrimination in small business credit markets have a significant impact on the estimation of discrimination and provides a preliminary investigation into the causes of discrimination in these markets. We find substantial, statistically significant evidence of discrimination in loan approval against black-owned and Hispanic-owned businesses in 1998 with additional control variables, with a variety of different specifications, and with a simultaneous model of the application and loan-denial decisions. We also find that discrimination in small business lending may take the form of statistical discrimination, driven by lenders' stereotypes about the ability of black- and Hispanic-owned businesses to succeed under some circumstances. In addition, we find that neither adding additional control variables nor accounting for possible endogeneity alters the conclusion that there is no discrimination in interest rates on approved loans. We also find, however, that black-owned businesses do face discrimination in interest rates when they deal with some types of lenders, particularly finance companies. Because finance companies specialize in higher-risk borrowers, this finding might indicate that they are willing to consider group-membership as a risk predictor despite the illegality of this practice. These findings suggest that federal financial regulatory agencies should re-double their efforts to uncover and prosecute lenders who discriminate against black- and Hispanic-owned businesses.
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Bibliographic InfoPaper provided by Center for Policy Research, Maxwell School, Syracuse University in its series Center for Policy Research Working Papers with number 74.
Length: 54 pages
Date of creation: Dec 2005
Date of revision:
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More information through EDIRC
credit; discrimination; entrepreneur; minority-owned business; small business;
Find related papers by JEL classification:
- J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities, Races, Indigenous Peoples, and Immigrants; Non-labor Discrimination
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- M13 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - New Firms; Startups
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-12-21 (All new papers)
- NEP-ENT-2005-12-22 (Entrepreneurship)
- NEP-FIN-2005-12-20 (Finance)
- NEP-FMK-2005-12-22 (Financial Markets)
- NEP-URE-2006-02-03 (Urban & Real Estate Economics)
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.:
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