Disaster Lending: The Distributional Consequences of Government Lending Programs

40 Pages Posted: 22 Mar 2018  

Taylor A. Begley

Washington University in St. Louis - John M. Olin Business School

Umit G. Gurun

University of Texas at Dallas

Amiyatosh K. Purnanandam

University of Michigan, Stephen M. Ross School of Business

Daniel Weagley

Georgia Institute of Technology - Scheller College of Business

Date Written: March 21, 2018

Abstract

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

Begley, Taylor A. and Gurun, Umit G. and Purnanandam, Amiyatosh K. and Weagley, Daniel, Disaster Lending: The Distributional Consequences of Government Lending Programs (March 21, 2018). Georgia Tech Scheller College of Business Research Paper No. 18-6. Available at SSRN: https://ssrn.com/abstract=3145298 or http://dx.doi.org/10.2139/ssrn.3145298

Taylor A. Begley (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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

Umit G. Gurun

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Amiyatosh K. Purnanandam

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Daniel Weagley

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
(404) 385-3015 (Phone)

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

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