Predictably Unequal? The Effects of Machine Learning on Credit Markets

73 Pages Posted: 17 Nov 2017 Last revised: 9 Nov 2018

See all articles by Andreas Fuster

Andreas Fuster

Swiss National Bank - Financial Stability

Paul Goldsmith-Pinkham

Federal Reserve Banks - Federal Reserve Bank of New York

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR)

Ansgar Walther

University of Warwick - Warwick Business School

Multiple version iconThere are 2 versions of this paper

Date Written: November 6, 2018

Abstract

Innovations in statistical technology, including in predicting creditworthiness, have sparked concerns about differential impacts across categories such as race. Theoretically, distributional consequences from better statistical technology can come from greater flexibility to uncover structural relationships, or from triangulation of otherwise excluded characteristics. Using data on US mortgages, we predict default using traditional and machine learning models. We find that Black and Hispanic borrowers are disproportionately less likely to gain from the introduction of machine learning. In a simple equilibrium credit market model, machine learning increases disparity in rates between and within groups; these changes are primarily attributable to greater flexibility.

Keywords: machine learning, credit, mortgages, disparate impact.

JEL Classification: G21, G28, R30

Suggested Citation

Fuster, Andreas and Goldsmith-Pinkham, Paul and Ramadorai, Tarun and Walther, Ansgar, Predictably Unequal? The Effects of Machine Learning on Credit Markets (November 6, 2018). Available at SSRN: https://ssrn.com/abstract=3072038 or http://dx.doi.org/10.2139/ssrn.3072038

Andreas Fuster

Swiss National Bank - Financial Stability ( email )

Boersenstrasse 15
Zurich, CH-8022
Switzerland

Paul Goldsmith-Pinkham

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Tarun Ramadorai (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.tarunramadorai.com

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Ansgar Walther

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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