Predictably Unequal? The Effects of Machine Learning on Credit Markets

60 Pages Posted: 20 Nov 2017

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); European Corporate Governance Institute (ECGI)

Ansgar Walther

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

Multiple version iconThere are 2 versions of this paper

Date Written: November 2017

Abstract

Recent innovations in statistical technology, including in evaluating creditworthiness, have sparked concerns about impacts on the fairness of outcomes across categories such as race and gender. We build a simple equilibrium model of credit provision in which to evaluate such impacts. We find that as statistical technology changes, the effects on disparity depend on a combination of the changes in the functional form used to evaluate creditworthiness using underlying borrower characteristics and the cross-category distribution of these characteristics. Employing detailed data on US mortgages and applications, we predict default using a number of popular machine learning techniques, and embed these techniques in our equilibrium model to analyze both extensive margin (exclusion) and intensive margin (rates) impacts on disparity. We propose a basic measure of cross-category disparity, and find that the machine learning models perform worse on this measure than logit models, especially on the intensive margin. We discuss the implications of our findings for mortgage policy.

Keywords: credit access, Machine Learning, Mortgages, statistical discrimination

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 2017). CEPR Discussion Paper No. DP12448, Available at SSRN: https://ssrn.com/abstract=3074447

Andreas Fuster (Contact Author)

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

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

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Ansgar Walther

Imperial College London ( email )

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

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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