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Credit Standards and Segregation

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  • Ouazad, Amine
  • Rancière, Romain

Abstract

How do credit standards on the mortgage market affect neighbourhood choice and the resulting level of urban segregation? To answer this question, we first develop a model of neighbourhood choice with credit constraints. The model shows that a relaxation of credit standards can either increase or decrease segregation, depending on racial income gaps and on races' preferences for neighbourhoods. We then estimate the effect of the relaxation of credit standards that accompanied the 1995-2006 mortgage credit boom on the level of school segregation. Census tract racial composition is strongly correlated with the racial composition of the 10 closest schools in the cross section. Matching a national data set of mortgage originations with annual racial demographics of each of the public schools in the United States from 1995 to 2006, we find that the relaxation of credit standards has caused an increase in the segregation of blacks through a lower exposure of blacks to Hispanics and whites.

Suggested Citation

  • Ouazad, Amine & Rancière, Romain, 2011. "Credit Standards and Segregation," CEPR Discussion Papers 8300, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8300
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    References listed on IDEAS

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    1. Card, David & Rothstein, Jesse, 2007. "Racial segregation and the black-white test score gap," Journal of Public Economics, Elsevier, vol. 91(11-12), pages 2158-2184, December.
    2. Francis Kramarz & Stephen Machin & Amine Ouazad, 2008. "What Makes a Test Score ? The Respective Contributions of Pupils, Schools and Peers in Achievement in English Primary Education," Working Papers 2008-21, Center for Research in Economics and Statistics.
    3. Giovanni Favara & Jean Imbs, 2015. "Credit Supply and the Price of Housing," American Economic Review, American Economic Association, vol. 105(3), pages 958-992, March.
    4. Dominique Goux & Eric Maurin, 2007. "Close Neighbours Matter: Neighbourhood Effects on Early Performance at School," Economic Journal, Royal Economic Society, vol. 117(523), pages 1193-1215, October.
    5. Ryo Nakajima, 2007. "Measuring Peer Effects on Youth Smoking Behaviour," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 897-935.
    6. Shubham Chaudhuri & Rajiv Sethi, 2008. "Statistical Discrimination with Peer Effects: Can Integration Eliminate Negative Stereotypes?," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 579-596.
    7. David M. Cutler & Edward L. Glaeser & Jacob L. Vigdor, 1999. "The Rise and Decline of the American Ghetto," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 455-506, June.
    8. Giovanni Dell’Ariccia & Deniz Igan & Luc Laeven, 2012. "Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 367-384, March.
    9. Charles T. Clotfelter, 1999. "Public School Segregation in Metropolitan Areas," Land Economics, University of Wisconsin Press, vol. 75(4), pages 487-504.
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    Citations

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    Cited by:

    1. Loayza,Norman V. & Ouazad,Amine & Ranciere,Romain, 2017. "Financial development, growth, and crisis: is there a trade-off ?," Policy Research Working Paper Series 8237, The World Bank.
    2. Florent Dubois, 2017. "The Sources of Segregation," Working Papers halshs-01524506, HAL.
    3. Amine Ouazad & Romain Rancière, 2015. "Structural Demand Estimation with Borrowing Constraints," PSE Working Papers halshs-01207997, HAL.
    4. repec:eee:regeco:v:68:y:2018:i:c:p:277-290 is not listed on IDEAS
    5. Amine Ouazad & Romain Rancière, 2017. "City Equilibrium with Borrowing Constraints: Structural Estimation and General Equilibrium Effects," NBER Working Papers 23994, National Bureau of Economic Research, Inc.
    6. Norman Loayza & Amine Ouazad & Romain Ranciere, 2017. "Financial Development, Growth, and Crisis: Is There a Trade-Off?," Working Papers 2017-114, Peruvian Economic Association.

    More about this item

    Keywords

    lending standards; mortgage; segregation;

    JEL classification:

    • H0 - Public Economics - - General
    • J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities, Races, Indigenous Peoples, and Immigrants; Non-labor Discrimination
    • R2 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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