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Credit Standards and Segregation

  • Ouazad, Amine
  • Rancière, Romain

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8300.

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Date of creation: Mar 2011
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Handle: RePEc:cpr:ceprdp:8300
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  1. Cutler, David & Vigdor, Jacob & Glaeser, Edward, 1999. "The Rise and Decline of the American Ghetto," Scholarly Articles 2770033, Harvard University Department of Economics.
  2. 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, 03.
  3. 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.
  4. Ryo Nakajima, 2004. "Measuring Peer Effects on Youth Smoking Behavior," ISER Discussion Paper 0600, Institute of Social and Economic Research, Osaka University.
  5. 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.
  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. Charles T. Clotfelter, 1999. "Public School Segregation in Metropolitan Areas," Land Economics, University of Wisconsin Press, vol. 75(4), pages 487-504.
  8. Giovanni Favara & Jean Imbs, 2015. "Credit Supply and the Price of Housing," American Economic Review, American Economic Association, vol. 105(3), pages 958-92, March.
  9. 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, Centre de Recherche en Economie et Statistique.
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