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Credit card redlining

Author Info

  • Ethan Cohen-Cole

Abstract

This paper evaluates the presence of racial disparities in the issuance of consumer credit. Using a unique and proprietary database of credit histories from a major credit bureau, this paper links location-based information on race with individual credit files. After controlling for the influence of such other place-specific factors as crime, housing vacancy rates, and general population demographics, the paper finds qualitatively large differences in the amount of credit offered to similarly qualified applicants living in Black versus White areas. An instrumental variables approach allows the paper to distinguish between issuer-provided credit (supply) and utilization of credit (demand), where instruments for demand are derived from social theory à la Veblen (i.e., `keeping up with the Joneses'). The results suggest that the observed differences in credit lines by racial composition of neighborhood are largely driven by issuer decisions rather than by demand.

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Paper provided by Federal Reserve Bank of Boston in its series Risk and Policy Analysis Unit Working Paper with number QAU08-1.

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Date of creation: 2008
Date of revision:
Handle: RePEc:fip:fedbqu:qau08-1
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Keywords: Discrimination in consumer credit;

This paper has been announced in the following NEP Reports:

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  1. Coate, Stephen & Loury, Glenn C, 1993. "Will Affirmative-Action Policies Eliminate Negative Stereotypes?," American Economic Review, American Economic Association, vol. 83(5), pages 1220-40, December.
  2. Harbaugh, Richmond, 1996. "Falling behind the Joneses: relative consumption and the growth-savings paradox," Economics Letters, Elsevier, vol. 53(3), pages 297-304, December.
  3. Alicia H. Munnell, 1992. "Mortgage lending in Boston: interpreting HMDA data," Working Papers 92-7, Federal Reserve Bank of Boston.
  4. BOCCARD, Nicolas & ZENOU, Yves, 1999. "Racial discrimination and redlining in cities," CORE Discussion Papers 1999013, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. repec:att:wimass:9127 is not listed on IDEAS
  6. Manski, Charles F, 1993. "Identification of Endogenous Social Effects: The Reflection Problem," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 531-42, July.
  7. Adriaan R. Soetevent, 2006. "Empirics of the Identification of Social Interactions; An Evaluation of the Approaches and Their Results ," Journal of Economic Surveys, Wiley Blackwell, vol. 20(2), pages 193-228, 04.
  8. Brock,W.A. & Durlauf,S.N., 2000. "Discrete choice with social interactions," Working papers 7, Wisconsin Madison - Social Systems.
  9. Moro, Andrea & Norman, Peter, 2004. "A general equilibrium model of statistical discrimination," Journal of Economic Theory, Elsevier, vol. 114(1), pages 1-30, January.
  10. Tootell, Geoffrey M B, 1996. "Redlining in Boston: Do Mortgage Lenders Discriminate against Neighborhoods?," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1049-79, November.
  11. Bagwell, Laurie Simon & Bernheim, B Douglas, 1996. "Veblen Effects in a Theory of Conspicuous Consumption," American Economic Review, American Economic Association, vol. 86(3), pages 349-73, June.
  12. Fred J. Phillips-Patrick & Clifford V. Rossi, 1996. "Statistical Evidence of Mortgage Redlining? A Cautionary Tale," Journal of Real Estate Research, American Real Estate Society, vol. 11(1), pages 13-24.
  13. Duca John V. & Rosenthal Stuart S., 1993. "Borrowing Constraints, Household Debt, and Racial Discrimination in Loan Markets," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 77-103, October.
  14. Basmann, Robert L & Molina, David J & Slottje, Daniel J, 1988. "A Note on Measuring Veblen's Theory of Conspicuous Consumption," The Review of Economics and Statistics, MIT Press, vol. 70(3), pages 531-35, August.
  15. Sandra Braunstein & Carolyn Welch, 2002. "Financial literacy: an overview of practice, research, and policy," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Nov, pages 445-457.
  16. Ferguson, Michael F & Peters, Stephen R, 1995. " What Constitutes Evidence of Discrimination in Lending?," Journal of Finance, American Finance Association, vol. 50(2), pages 739-48, June.
  17. David B. Gross & Nicholas S. Souleles, 2002. "Do Liquidity Constraints And Interest Rates Matter For Consumer Behavior? Evidence From Credit Card Data," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 149-185, February.
  18. Paige Marta Skiba & Jeremy Tobacman, 2007. "Measuring the individual-level effects of access to credit: evidence from payday loans," Proceedings 1069, Federal Reserve Bank of Chicago.
  19. Wendy Edelberg, 2007. "Racial dispersion in consumer credit interest rates," Finance and Economics Discussion Series 2007-28, Board of Governors of the Federal Reserve System (U.S.).
  20. Ying Li & Eric Rosenblatt, 1997. "Can Urban Indicators Predict Home Price Appreciation? Implications for Redlining Research," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 25(1), pages 81-104.
  21. Stephen L. Ross & John Yinger, 2002. "The Color of Credit: Mortgage Discrimination, Research Methodology, and Fair-Lending Enforcement," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262182289, August.
  22. Edward S. Prescott & Daniel D. Tatar, 1999. "Means of payment, the unbanked, and EFT '99," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 49-70.
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Cited by:

  1. Ethan Cohen-Cole, 2009. "The option value of consumer bankruptcy," Risk and Policy Analysis Unit Working Paper QAU09-1, Federal Reserve Bank of Boston.
  2. Gathergood John, 2011. "Racial Disparities in Credit Constraints in the Great Recession: Evidence from the UK," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-32, September.
  3. Song Han & Benjamin J. Keys & Geng Li, 2011. "Credit supply to personal bankruptcy filers: evidence from credit card mailings," Finance and Economics Discussion Series 2011-29, Board of Governors of the Federal Reserve System (U.S.).
  4. Chatterji, Aaron K. & Seamans, Robert C., 2012. "Entrepreneurial finance, credit cards, and race," Journal of Financial Economics, Elsevier, vol. 106(1), pages 182-195.
  5. Ethan Cohen-Cole & Burcu Duygan-Bump, 2008. "Household bankruptcy decision: the role of social stigma vs. information sharing," Risk and Policy Analysis Unit Working Paper QAU08-6, Federal Reserve Bank of Boston.
  6. Craig, Ben R. & Dinger, Valeriya, 2013. "Deposit market competition, wholesale funding, and bank risk," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3605-3622.
  7. Cohen-Cole, Ethan & Duygan-Bump, Burcu & Montoriol-Garriga, Judit, 2013. "Who gets credit after bankruptcy and why? An information channel," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5101-5117.
  8. Yelowitz, Aaron & Scott, Frank & Beck, Jason, 2011. "The market for real estate brokerage services in low- and high-income neighborhoods: A 6 city study," MPRA Paper 35608, University Library of Munich, Germany.
  9. Fourcade, Marion & Healy, Kieran, 2013. "Classification situations: Life-chances in the neoliberal era," Accounting, Organizations and Society, Elsevier, vol. 38(8), pages 559-572.

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