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Technological Innovation and Discrimination in Household Finance

Author

Listed:
  • Adair Morse
  • Karen Pence

Abstract

Technology has changed how discrimination manifests itself in financial services. Replacing human discretion with algorithms in decision-making roles reduces taste-based discrimination, and new modeling techniques have expanded access to financial services to households who were previously excluded from these markets. However, algorithms can exhibit bias from human involvement in the development process, and their opacity and complexity can facilitate statistical discrimination inconsistent with antidiscrimination laws in several aspects of financial services provision, including advertising, pricing, and credit-risk assessment. In this chapter, we provide a new amalgamation and analysis of these developments, identifying five gateways whereby technology induces discrimination to creep into financial services. We also consider how these technological changes in finance intersect with existing discrimination and data privacy laws, leading to our contribution of four frontlines of regulation. Our analysis concludes that the net effect of innovation in technological finance on discrimination is ambiguous and depends on the future choices made by policymakers, the courts, and firms.

Suggested Citation

  • Adair Morse & Karen Pence, 2020. "Technological Innovation and Discrimination in Household Finance," NBER Working Papers 26739, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26739
    Note: CF LE
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    More about this item

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • 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
    • G5 - Financial Economics - - Household Finance
    • K2 - Law and Economics - - Regulation and Business Law
    • K38 - Law and Economics - - Other Substantive Areas of Law - - - Human Rights Law; Gender Law
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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