Differential Access to Capital from Financial Institutions by Minority Entrepreneurs
42 Pages Posted: 2 Jun 2015
Date Written: May 2015
This paper examines if Minority small business borrowers have the same access to loans from financial institutions as similar White borrowers. Using matching methods, we find that African-American borrowers are rejected at a higher rate (17-33% higher) than similar risk White-owned firms. We find that the impact of unobservable variables has to be greater than 50%-60% the impact of observable variables to show no discrimination. This bound seems to be a high number given that we have controlled for a comprehensive list of borrower credit risk variables that include their actual credit score and wealth. If the effect of the unoberservable variables is less than this bound, then we have found a casual impact of discrimination for African-American borrowers. No such differential effect is found for Hispanic borrowers. Lumping both races together can give misleading results. Finding higher credit risks, higher rejection rates and equal expected losses for African-American-owned firms is consistent with the statistical or information-based theory of discrimination.
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