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Discrimination in Lending: Theory and Evidence

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  • Song Han

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Abstract

Using a general equilibrium model of credit market discrimination, I find that both taste-based discrimination and statistical discrimination have similar predictions for the intergroup differences in loan terms. The commonly held view has been that if taste-based discrimination exists, loans approved to minority borrowers will have higher expected profitability than those to majorities with comparable credit background. I show that the validity of this profitability view depends crucially on how expected loan profitability is measured. I also show that taste-based discrimination must exist if loans to minority borrowers have higher expected rates of return or lower expected rates of default loss than those to majorities with the same exogenous characteristics observed by lender at the time of loan originations. My analysis suggests that the valid method to test for taste-based discrimination should be reduced-form regressions. Empirically, I fail to find supporting evidence for the existence of taste-based discrimination.

Suggested Citation

  • Song Han, 2004. "Discrimination in Lending: Theory and Evidence," The Journal of Real Estate Finance and Economics, Springer, vol. 29(1), pages 5-46, July.
  • Handle: RePEc:kap:jrefec:v:29:y:2004:i:1:p:5-46
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    Cited by:

    1. James Kau & Donald Keenan & Henry Munneke, 2012. "Racial Discrimination and Mortgage Lending," The Journal of Real Estate Finance and Economics, Springer, vol. 45(2), pages 289-304, August.
    2. Rolando Gonzales & Gabriela Aguilera-Lizarazu & Andrea Rojas-Hosse & Patricia Aranda, 2016. "Preference for women but less preference for indigenous women: A lab-field experiment of loan discrimination in a developing economy," Working Papers PIERI 2016-24, PEP-PIERI.
    3. Levy, Marc, 2011. "The Banzhaf index in complete and incomplete shareholding structures: A new algorithm," European Journal of Operational Research, Elsevier, pages 411-421.
    4. Agier, Isabelle & Szafarz, Ariane, 2013. "Microfinance and Gender: Is There a Glass Ceiling on Loan Size?," World Development, Elsevier, pages 165-181.
    5. Berggren, Niclas & Jordahl, Henrik & Poutvaara, Panu, 2010. "The Right Look: Conservative Politicians Look Better and Their Voters Reward it," Ratio Working Papers 161, The Ratio Institute.
    6. repec:spr:elcore:v:17:y:2017:i:4:d:10.1007_s10660-016-9247-2 is not listed on IDEAS
    7. Stephen L. Ross, 2005. "The Continuing Practice and Impact of Discrimination," Working papers 2005-19, University of Connecticut, Department of Economics, revised Jul 2006.
    8. Stephen L. Ross, 2003. "What Is Known about Testing for Discrimination: Lessons Learned by Comparing across Different Markets," Working papers 2003-21, University of Connecticut, Department of Economics, revised Nov 2003.
    9. Thorsten Beck & Patrick Behr & Andreas Madestam, 2011. "Sex and Credit: Is There a Gender Bias in Lending?," Working Papers 411, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    10. Méon, Pierre-Guillaume & Sekkat, Khalid, 2015. "The formal and informal institutional framework of capital accumulation," Journal of Comparative Economics, Elsevier, vol. 43(3), pages 754-771.
    11. Beck, T.H.L. & Behr, P. & Madestam, A., 2011. "Sex and Credit : Is There a Gender Bias in Microfinance?," Discussion Paper 2011-101, Tilburg University, Center for Economic Research.
    12. Valentina Dimitrova-Grajzl & Peter Grajzl & A. Joseph Guse & Richard M. Todd & Michael Williams, 2015. "Neighborhood Racial Characteristics, Credit History, and Bankcard Credit in Indian Country," CESifo Working Paper Series 5594, CESifo Group Munich.
    13. Dongyu Chen & Xiaolin Li & Fujun Lai, 0. "Gender discrimination in online peer-to-peer credit lending: evidence from a lending platform in China," Electronic Commerce Research, Springer, vol. 0, pages 1-31.
    14. Song Han, 2011. "Creditor Learning and Discrimination in Lending," Journal of Financial Services Research, Springer;Western Finance Association, pages 1-27.

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