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On the economics of discrimination in credit markets

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  • Song Han

Abstract

This paper develops a general equilibrium model of both taste-based and statistical discrimination in credit markets. We find that both types of discrimination have similar predictions for intergroup differences in loan terms. The commonly held view has been that if there exists taste-based discrimination, loans approved to minority borrowers would have higher expected profitability than to majorities with comparable credit background. We show that the validity of this profitability view depends crucially on how expected loan profitability is measured. We also show that there must exist taste-based discrimination if loans to minority borrowers have higher expected rate of return or lower expected rate of default loss than to majorities with the same exogenous characteristics at the time of loan origination. Empirical evidence on expected rate of default loss cannot reject the null hypothesis of non-existence of taste-based discrimination.

Suggested Citation

  • Song Han, 2002. "On the economics of discrimination in credit markets," Finance and Economics Discussion Series 2002-2, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2002-2
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    Cited by:

    1. 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.).

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    More about this item

    Keywords

    Discrimination in mortgage loans; Discrimination in consumer credit;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • J7 - Labor and Demographic Economics - - Labor Discrimination

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