A Structural Econometric Model of Price Discrimination in the Mortgage Lending Industry
We propose a model of discrimination in the market for mortgages. The model explains accepted loan applications and determines loan sizes and interest rates simultaneously. A competitive, and a discriminating monopoly version of the model are proposed. Offered interest rates and loan sizes are a function of observable borrower characteristics. The competitive model rests on a marginal condition, re°ecting contract optimality, to which a zero-profit condition is added. In contrast, the discriminating monopoly maximizes profitsunder a borrower participation constraint, reflecting the availability of a rental market as an outside option. Each version of the model is a bivariate, nonlinear model, and is estimated by standard maximum likelihood methods. The data used for estimation is a sample of clients of a French network of mortgage lenders. We show the presence of "social discrimination" in the data, the loan conditions depending, not only on the borrower's wage and downpayment, but also on the borrower's occupational status. Abnormally high risk premia in the competitive version of the model suggest the presence of market power, justifying an attempt at estimating its monopolistic version. The discriminating monopoly model estimates show that the borrowers' price-elasticity of demand for housing varies with occupational status, and is inversely related with the lender's interest rate markups. This confirms that the lender exploits structural differences in the preferences to discriminate, as predicted by standard theories.
|Date of creation:||2002|
|Contact details of provider:|| Postal: Poschingerstrasse 5, 81679 Munich|
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Web page: http://www.cesifo-group.de
More information through EDIRC
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.:
- Marc Ivaldi & David Martimort, 1994.
"Competition under Nonlinear Pricing,"
Annals of Economics and Statistics,
GENES, issue 34, pages 13-69.
- Ivaldi, M. & Martimort, D., 1992. "Competition Under Nonlinear Pricing," Papers 93.288, Toulouse - GREMAQ.
- Ivaldi, Marc & Martimort, David, 1993. "Competition under Nonlinear Pricing," IDEI Working Papers 29, Institut d'Économie Industrielle (IDEI), Toulouse.
- Pierre-André Chiappori & Jean Pinquet, 1999. "L'assurance-chômage des emprunteurs," Revue Française d'Économie, Programme National Persée, vol. 14(1), pages 91-115.
- P.-A. Chiappori & J. Pinquet, 1999. "Assurance chômage des emprunteurs," THEMA Working Papers 99-01, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
- Chiappori, P.A. & Pinquet, J., 1999. "Assurance chomage des emprunteurs," Papers 99-01, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
- Jean Pinquet & Pierre-André Chiappori, 1999. "L'assurance chômage des emprunteurs," Post-Print hal-00396961, HAL.
- Pinelopi Koujianou Goldberg & Frank Verboven, 2001. "The Evolution of Price Dispersion in the European Car Market," Review of Economic Studies, Oxford University Press, vol. 68(4), pages 811-848.
- Goldberg, Pinelopi Koujianou & Verboven, Frank, 1998. "The Evolution of Price Dispersion in the European Car Market," CEPR Discussion Papers 2029, C.E.P.R. Discussion Papers.
- Pinelopi Koujianou Goldberg & Frank Verboven, 1998. "The Evolution of Price Dispersion in the European Car Market," NBER Working Papers 6818, National Bureau of Economic Research, Inc.
- Eugenio J. Miravete, 2002. "Estimating Demand for Local Telephone Service with Asymmetric Information and Optional Calling Plans," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 943-971.
- Miravete, Eugenio J, 2000. "Estimating Demand for Local Telephone Service with Asymmetric Information and Optional Calling Plans," CEPR Discussion Papers 2635, C.E.P.R. Discussion Papers.
- Cavalluzzo, Ken S & Cavalluzzo, Linda C, 1998. "Market Structure and Discrimination: The Case of Small Businesses," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 771-792, November.
- Munnell, Alicia H. & Geoffrey M. B. Tootell & Lynn E. Browne & James McEneaney, 1996. "Mortgage Lending in Boston: Interpreting HMDA Data," American Economic Review, American Economic Association, vol. 86(1), pages 25-53, March.
- Alicia H. Munnell, 1992. "Mortgage lending in Boston: interpreting HMDA data," Working Papers 92-7, Federal Reserve Bank of Boston.
- Mark Armstrong, 1999. "Price Discrimination by a Many-Product Firm," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 151-168.
- Armstrong, M., 1996. "Price discrimination by a many-product firm," Discussion Paper Series In Economics And Econometrics 9628, Economics Division, School of Social Sciences, University of Southampton.
- Calem Paul & Stutzer Michael, 1995. "The Simple Analytics of Observed Discrimination in Credit Markets," Journal of Financial Intermediation, Elsevier, vol. 4(3), pages 189-212, July.
- Bousquet, Alain & Ivaldi, Marc, 1997. "Optimal pricing of telephone usage: An econometric implementation," Information Economics and Policy, Elsevier, vol. 9(3), pages 219-239, September.
- Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
- Helen F. Ladd, 1998. "Evidence on Discrimination in Mortgage Lending," Journal of Economic Perspectives, American Economic Association, vol. 12(2), pages 41-62, Spring.
- James A. Berkovec & Glenn B. Canner & Stuart A. Gabriel & Timothy H. Hannan, 1998. "Discrimination, Competition, And Loan Performance In Fha Mortgage Lending," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 241-250, May.
- Brueckner, Jan K, 2000. "Mortgage Default with Asymmetric Information," The Journal of Real Estate Finance and Economics, Springer, vol. 20(3), pages 251-274, May.
- Phillip Leslie, 2004. "Price Discrimination in Broadway Theater," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 520-541, Autumn.
- Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-855, September.
- Hellmuth Milde & John G. Riley, 1988. "Signaling in Credit Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 103(1), pages 101-129.
- Phelps, Edmund S, 1972. "The Statistical Theory of Racism and Sexism," American Economic Review, American Economic Association, vol. 62(4), pages 659-661, September.
- Brueckner Jan K., 1994. "Borrower Mobility, Adverse Selection, and Mortgage Points," Journal of Financial Intermediation, Elsevier, vol. 3(4), pages 416-441, September.
- Chari, V V & Jagannathan, Ravi, 1989. " Adverse Selection in a Model of Real Estate Lending," Journal of Finance, American Finance Association, vol. 44(2), pages 499-508, June.
- Paul S. Calem & Michael J. Stutzer, 1995. "The simple analytics of observed discrimination in credit markets," Working Papers 95-7, Federal Reserve Bank of Philadelphia. Full references (including those not matched with items on IDEAS)