Do Credit Market Barriers Exist for Minority and Woman Entrepreneurs?

Syracuse University Center for Policy Research Working Paper No. 74

54 Pages Posted: 20 Apr 2011

See all articles by Lloyd A. Blanchard

Lloyd A. Blanchard

affiliation not provided to SSRN

Bo Zhao

Federal Reserve Bank of Boston

John Yinger

Syracuse University, Maxwell School of Citizenship and Public Affairs

Date Written: December 1, 2005

Abstract

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.

Keywords: credit, discrimination, entrepreneur, minority-owned business, small business

JEL Classification: J15, G21, M13

Suggested Citation

Blanchard, Lloyd A. and Zhao, Bo and Yinger, John, Do Credit Market Barriers Exist for Minority and Woman Entrepreneurs? (December 1, 2005). Syracuse University Center for Policy Research Working Paper No. 74. Available at SSRN: https://ssrn.com/abstract=1815226 or http://dx.doi.org/10.2139/ssrn.1815226

Lloyd A. Blanchard

affiliation not provided to SSRN ( email )

Bo Zhao

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
T-10
Boston, MA 02210
United States
617-973-3061 (Phone)
617-619-8357 (Fax)

HOME PAGE: http://sites.google.com/site/bozhao/

John Yinger (Contact Author)

Syracuse University, Maxwell School of Citizenship and Public Affairs ( email )

Center for Policy Research
426 Eggers Hall
Syracuse, NY 13244-1020
United States
315-443-9062 (Phone)

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