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Do lenders discriminate against minority and woman entrepreneurs?

  • Blanchard, Lloyd
  • Zhao, Bo
  • Yinger, John

This paper draws on a conceptual analysis of discrimination to improve the methodology for estimating discrimination in small-business credit markets and to provide some evidence about the possible causes of discrimination in these markets. Using a variety of statistical enhancements to existing studies, we find statistically significant evidence of substantial discrimination in loan approval against black-owned and Hispanic-owned businesses in 1998. We also find some hints that this discrimination takes the form of statistical discrimination, driven by lenders' stereotypes about the ability of black- and Hispanic-owned businesses to succeed under some circumstances. Although we find no discrimination, on average, in interest rates on approved loans, we also find that black-owned businesses do face discrimination in interest rates when they borrow from finance companies and businesses, such as mutual fund companies and leasing companies, with a primary mission other than lending. 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 and that new tools may be needed to find discrimination by firms not well covered by the existing fair-lending enforcement system.

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File URL: http://www.sciencedirect.com/science/article/pii/S0094-1190(07)00032-0
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Article provided by Elsevier in its journal Journal of Urban Economics.

Volume (Year): 63 (2008)
Issue (Month): 2 (March)
Pages: 467-497

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Handle: RePEc:eee:juecon:v:63:y:2008:i:2:p:467-497
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622905

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  17. Raphael W. Bostic & K. Patrick Lampani, 1999. "Racial differences in patterns of small business finance: the importance of local geography," Proceedings 775, Federal Reserve Bank of Chicago.
  18. Stanley D. Longhofer, 1996. "Cultural affinity and mortgage discrimination," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 12-24.
  19. David G. Blanchflower & Phillip B. Levine & David J. Zimmerman, 1998. "Discrimination in the Small Business Credit Market," NBER Working Papers 6840, National Bureau of Economic Research, Inc.
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