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Do Credit Market Barriers Exist for Minority and Women Entrepreneurs?

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This paper examines whether methodological deficiencies in the literature on discrimination in small business credit markets have a significant impact on the estimation of discrimination and provides a preliminary investigation into the causes of discrimination in these markets. We find substantial, statistically significant evidence of discrimination in loan approval against black-owned and Hispanic-owned businesses in 1998 with additional control variables, with a variety of different specifications, and with a simultaneous model of the application and loan-denial decisions. We also find that discrimination in small business lending may take the form of statistical discrimination, driven by lenders' stereotypes about the ability of black- and Hispanic-owned businesses to succeed under some circumstances. In addition, we find that neither adding additional control variables nor accounting for possible endogeneity alters the conclusion that there is no discrimination in interest rates on approved loans. We also find, however, that black-owned businesses do face discrimination in interest rates when they deal with some types of lenders, particularly finance companies. Because finance companies specialize in higher-risk borrowers, this finding might indicate that they are willing to consider group-membership as a risk predictor despite the illegality of this practice. These findings suggest that federal financial regulatory agencies should re-double their efforts to uncover and prosecute lenders who discriminate against black- and Hispanic-owned businesses.

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  • Lloyd Blanchard & Bo Zhao & John Yinger, 2005. "Do Credit Market Barriers Exist for Minority and Women Entrepreneurs?," Center for Policy Research Working Papers 74, Center for Policy Research, Maxwell School, Syracuse University.
  • Handle: RePEc:max:cprwps:74
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    Cited by:

    1. Muravyev, Alexander & Talavera, Oleksandr & Schäfer, Dorothea, 2009. "Entrepreneurs' gender and financial constraints: Evidence from international data," Journal of Comparative Economics, Elsevier, vol. 37(2), pages 270-286, June.
    2. Brett Barkley & Mark E. Schweitzer, 2022. "Credit Availability for Minority Business Owners in an Evolving Credit Environment: Before and During the COVID-19 Pandemic," Working Papers 22-18, Federal Reserve Bank of Cleveland.
    3. Robert W. Fairlie, 2013. "Minority and immigrant entrepreneurs: access to financial capital," Chapters, in: Amelie F. Constant & Klaus F. Zimmermann (ed.), International Handbook on the Economics of Migration, chapter 8, pages 153-175, Edward Elgar Publishing.
    4. Robert W. Fairlie & Alicia M. Robb, 2008. "Race and Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses in the United States," MIT Press Books, The MIT Press, edition 1, volume 1, number 026206281x.
    5. Anh L.N. Ngo, 2019. "Index of Financial Inclusion and the Determinants: An Investigation in Asia," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 9(12), pages 1368-1382, December.
    6. 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.

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    More about this item

    Keywords

    credit; discrimination; entrepreneur; minority-owned business; small business;
    All these keywords.

    JEL classification:

    • J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities, Races, Indigenous Peoples, and Immigrants; Non-labor Discrimination
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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