Disaster Lending: The Distributional Consequences of Government Lending Programs
40 Pages Posted: 22 Mar 2018
Date Written: March 21, 2018
Residents of areas with a greater proportion of minorities are denied credit through the Small Business Administration's (SBA) disaster lending program at a significantly higher rate than areas with a lower proportion of minorities. This difference in denial rates is not explained by observable differences in credit risk and is larger than the corresponding difference in denial rates in private lending markets. We find no evidence that taste-based discrimination is driving this result. Rather, we find the difference in denial rates is likely driven by the SBA's use of risk-insensitive loan pricing, where the same interest rate is offered to all approved borrowers irrespective of their relative creditworthiness. This leads to outcomes where borrowers that would likely receive a loan at a higher interest rate are instead denied credit altogether. Overall, our findings highlight the importance of using market prices as a mechanism to allocate credit across borrowers. Programs that limit the use of this mechanism to ensure a "fair" price of credit across borrowers may have unintended "unfair" consequences on the quantity of credit.
Keywords: credit access, discrimination, income inequality, government lending, unintended consequences
JEL Classification: G21, G28, H81, H84
Suggested Citation: Suggested Citation