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Discrimination in the Small Business Credit Market

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  • David G. Blanchflower
  • Phillip B. Levine
  • David J. Zimmerman

Abstract

This paper uses data from the 1993 National Survey of Small Business Finances to determine the extent to which minority-owned small businesses face constraints in the credit market beyond those faced by white-owned small businesses. First, we present qualitative evidence indicating that black- and white-owned firms report similar concerns about the factors that may affect their businesses except that blacks are far more likely to report problems with credit availability. Second, we conduct an econometric analysis of loan denial probabilities by race and find that black-owned small businesses are almost three times more likely to have a loan application denied. Even after controlling for the differences in credit-worthiness and other factors that exist between black- and white-owned firms, blacks are still about twice as likely to be denied credit. A series of specification checks indicates that this gap is unlikely to be largely attributed to omitted variable bias. Third, we conduct a similar analysis regarding interest rates charged to approved loans and find black-owned firms pay higher interest rates as well. Finally, even these results are likely to understate differences in credit access because many potential black-owned firms are not in operation due to the lack of credit and those in business may be too afraid to apply. These results indicate that the racial disparity in credit availability is likely caused by discrimination.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6840.

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Date of creation: Dec 1998
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Publication status: published as David G. Blanchflower & Phillip B. Levine & David J. Zimmerman, 2003. "Discrimination in the Small-Business Credit Market," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 930-943, 09.
Handle: RePEc:nbr:nberwo:6840

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  16. Blanchflower, D. & Oswald, A., 1990. "Working Internationally," Papers 371, London School of Economics - Centre for Labour Economics.
  17. Helen F. Ladd, 1998. "Evidence on Discrimination in Mortgage Lending," Journal of Economic Perspectives, American Economic Association, vol. 12(2), pages 41-62, Spring.
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  19. Oaxaca, Ronald, 1973. "Male-Female Wage Differentials in Urban Labor Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(3), pages 693-709, October.
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  21. Lynn Elaine Browne & Geoffrey M.B. Tootell, 1995. "Mortgage lending in Boston: a response to the critics," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 53-78.
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  23. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 219-34, February.
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