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Self-selection and discrimination in credit markets

Author

Listed:
  • Stanley D. Longhofer
  • Stephen R. Peters

Abstract

This paper increases understanding of the causes and consequences of discrimination in credit markets. It develops an underwriting model in which lenders use a simple Bayesian updating process to evaluate applicant creditworthiness. It also models individuals' self-selection behavior to show how market frictions can affect application decisions.

Suggested Citation

  • Stanley D. Longhofer & Stephen R. Peters, 1998. "Self-selection and discrimination in credit markets," Working Paper 9809, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwp:9809
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    References listed on IDEAS

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    1. Hunter, William C & Walker, Mary Beth, 1996. "The Cultural Affinity Hypothesis and Mortgage Lending Decisions," The Journal of Real Estate Finance and Economics, Springer, vol. 13(1), pages 57-70, July.
    2. Duca, John V & Rosenthal, Stuart S, 1994. "Do Mortgage Rates Vary Based on Household Default Characteristics? Evidence on Rate Sorting and Credit Rationing," The Journal of Real Estate Finance and Economics, Springer, vol. 8(2), pages 99-113, March.
    3. Stanley D. Longhofer, 1996. "Cultural affinity and mortgage discrimination," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 12-24.
    4. Phelps, Edmund S, 1972. "The Statistical Theory of Racism and Sexism," American Economic Review, American Economic Association, vol. 62(4), pages 659-661, September.
    5. James A. Berkovec & Glenn B. Canner & Stuart A. Gabriel & Timothy H. Hannan, 1994. "Race, redlining, and residential mortgage loan performance," Proceedings, Federal Reserve Bank of Philadelphia, pages 263-298.
    6. David Horne, 1997. "Mortgage Lending, Race, and Model Specification," Journal of Financial Services Research, Springer;Western Finance Association, vol. 11(1), pages 43-68, February.
    7. Michael Ferguson & Stephen Peters, 1997. "Cultural Affinity and Lending Discrimination: The Impact of Underwriting Errors and Credit Risk Distribution on Applicant Denial Rates," Journal of Financial Services Research, Springer;Western Finance Association, vol. 11(1), pages 153-168, February.
    8. James J. Heckman, 1998. "Detecting Discrimination," Journal of Economic Perspectives, American Economic Association, vol. 12(2), pages 101-116, Spring.
    9. Day, Theodore E & Liebowitz, S J, 1998. "Mortgage Lending to Minorities: Where's the Bias?," Economic Inquiry, Western Economic Association International, vol. 36(1), pages 3-28, January.
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    14. Geoffrey M.B. Tootell, 1993. "Defaults, denials, and discrimination in mortgage lending," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 45-51.
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    24. Avery, Robert B & Beeson, Patricia E & Sniderman, Mark S, 1996. "Posted Rates and Mortgage Lending Activity," The Journal of Real Estate Finance and Economics, Springer, vol. 13(1), pages 11-26, July.
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    Cited by:

    1. Judith A. Giles & Marsha J. Courchane, 2000. "Stratified Sample Design for Fair Lending Binary Logit Models," Econometrics Working Papers 0007, Department of Economics, University of Victoria.
    2. Song Han, 2001. "On the Economics of Discrimination in Credit Markets," Finance and Economics Discussion Series 2002-02, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Keywords

    Mortgages ; Discrimination in consumer credit;

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