Working Paper

The simple analytics of observed discrimination in credit markets

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.

Keywords: Discrimination in mortgage loans;

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 1995

Number: 95-7