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The simple analytics of observed discrimination in credit markets

Author

Listed:
  • Paul S. Calem
  • Michael J. Stutzer

Abstract

Controversial econometric studies of mortgage data show that mortgage loan applications by minorities are denied more frequently than are applications by whites with similar observable default risk factors. But recent evidence indicates that minority borrowers also default more frequently than whites with similar observable risk. This paper presents a simple equilibrium model of discriminatory credit rationing and finds parametric restrictions consistent with both these empirical findings. But in this model, proposed anti-discrimination policies have surprising side effects. Thus, policy analysts accepting this empirical evidence should not expect to derive model-free conclusions about the effects of proposed policies.

Suggested Citation

  • Paul S. Calem & Michael J. Stutzer, 1995. "The simple analytics of observed discrimination in credit markets," Working Papers 95-7, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:95-7
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    Citations

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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.).
    3. DeGennaro, Ramon P., 2005. "Market imperfections," Journal of Financial Transformation, Capco Institute, vol. 14, pages 107-117.
    4. Stanley D. Longhofer, 1996. "Cultural affinity and mortgage discrimination," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 12-24.
    5. Gary-Bobo, Robert J. & Larribeau, Sophie, 2002. "A Structural Econometric Model of Price Discrimination in the Mortgage Lending Industry," CEPR Discussion Papers 3302, C.E.P.R. Discussion Papers.
    6. Black, Harold A. & Boehm, Thomas P. & DeGennaro, Ramon P., 2003. "Is there discrimination in mortgage pricing? The case of overages," Journal of Banking & Finance, Elsevier, vol. 27(6), pages 1139-1165, June.
    7. Dharmapala Dhammika & Ross Stephen L, 2004. "Racial Bias in Motor Vehicle Searches: Additional Theory and Evidence," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-23, September.
    8. 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.
    9. Gary-Bobo, Robert J. & Larribeau, Sophie, 2004. "A structural econometric model of price discrimination in the French mortgage lending industry," International Journal of Industrial Organization, Elsevier, vol. 22(1), pages 101-134, January.
    10. Robert Gary-Bobo & Sophie Larribeau, 2003. "The bank's market power and the interest-rate elasticity of demand for housing : an econometric study of discrimination on French mortgage data," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00069667, HAL.
    11. Judith Clarke & Marsha Courchane, 2004. "Implications of Stratified Sampling for Fair Lending Binary Logit Models," The Journal of Real Estate Finance and Economics, Springer, vol. 30(1), pages 5-31, October.
    12. Bellucci, Andrea & Borisov, Alexander & Zazzaro, Alberto, 2010. "Does gender matter in bank-firm relationships? Evidence from small business lending," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2968-2984, December.
    13. Stanley D. Longhofer & Stephen R. Peters, 1998. "Beneath the rhetoric: clarifying the debate on mortgage lending discrimination," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 2-13.
    14. AKM Rezaul Hossain, 2005. "A Simple Model of Credit Rationing with Information Externalities," Working papers 2005-11, University of Connecticut, Department of Economics.
    15. Song Han, 2011. "Creditor Learning and Discrimination in Lending," Journal of Financial Services Research, Springer;Western Finance Association, vol. 40(1), pages 1-27, October.
    16. Stanley D. Longhofer & Stephen R. Peters, 1998. "Self-selection and discrimination in credit markets," Working Paper 9809, Federal Reserve Bank of Cleveland.
    17. Scalera, Domenico & Zazzaro, Alberto, 2001. "Group reputation and persistent (or permanent) discrimination in credit markets," Journal of Multinational Financial Management, Elsevier, vol. 11(4-5), pages 483-496, December.

    More about this item

    Keywords

    Discrimination in mortgage loans;

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