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How to identify lending bias when the lender's goal is not profit?

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  • Anastasia Cozarenco
  • Ariane Szafarz

Abstract

Outcome tests for discrimination in the credit market typically assume that profit is the lender’s goal. This assumption ignores nonprofit and social lending institutions that value prosocial outcomes. These institutions may combine positive and negative discrimination, further complicating the identification of bias. We propose a test for discrimination in lending that is robust to the profit orientation of the lender. Consistent with the Basel framework for credit risk management, our test is based on recovery records. It is applicable to the identification of both positive and negative bias.

Suggested Citation

  • Anastasia Cozarenco & Ariane Szafarz, 2024. "How to identify lending bias when the lender's goal is not profit?," Working Papers CEB 24-007, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:sol:wpaper:2013/369880
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    More about this item

    Keywords

    Test for credit discrimination; prosocial lender; social finance; discrimination; affirmative action;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities, Races, Indigenous Peoples, and Immigrants; Non-labor Discrimination
    • J16 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Gender; Non-labor Discrimination
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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