IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Self-Selection and Discrimination in Credit Markets

Listed author(s):
  • Stanley D. Longhofer
  • Stephen R. Peters
Registered author(s):

    In this article we make two contributions toward a better understanding of the causes and consequences of discrimination in credit markets. First, we develop an explicit theoretical model of loan underwriting in which lenders use a simple Bayesian updating process to evaluate applicant creditworthiness. Using a signal correlated with an applicant's true creditworthiness and their prior beliefs about the distribution of credit risk in the applicant pool, lenders are able to evaluate an applicant's expected or "inferred" creditworthiness to determine which loans to approve and which to deny. Second, we explicitly model the self-selection behavior of individuals. Because these decisions shape lenders' prior beliefs about the distribution of credit risk, they also affect the Bayesian posterior from which lenders compute an applicant's inferred creditworthiness, implying that statistical discrimination can arise endogenously. As an example, we show that in a market in which only some lenders have Beckerian tastes for discrimination there are conditions under which lenders without racial animus will also discriminate. Our model's flexibility makes it ideal for analyzing a wide variety of empirical and policy questions. Copyright 2005 by the American Real Estate and Urban Economics Association

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

    Volume (Year): 33 (2005)
    Issue (Month): 2 (06)
    Pages: 237-268

    in new window

    Handle: RePEc:bla:reesec:v:33:y:2005:i:2:p:237-268
    Contact details of provider: Postal:
    Indiana University, Kelley School of Business, 1309 East Tenth Street, Suite 738, Bloomington, Indiana 47405

    Phone: (812) 855-7794
    Fax: (812) 855-8679
    Web page:

    More information through EDIRC

    Order Information: Web:

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:bla:reesec:v:33:y:2005:i:2:p:237-268. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)

    or (Christopher F. Baum)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.