Disaster Lending: "Fair" Prices, but "Unfair" Access

42 Pages Posted: 22 Mar 2018 Last revised: 4 Dec 2018

See all articles by Taylor A. Begley

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: December 3, 2018

Abstract

The use of risk-insensitive loan pricing by the Small Business Administration's disaster loan program leads to significantly higher loan denials in areas with greater need for price discrimination: high minority share, high subprime share, and high income inequality areas. Even though these borrowers are often the intended targets of government programs such as disaster lending, they end up with lower availability of credit in this program compared to private markets. Our findings highlight the importance of using market prices as a mechanism to allocate credit across borrowers, a feature that is often absent from government lending programs around the world. Applicants that would likely receive a loan at a higher interest rate under a risk-sensitive pricing mechanism are instead denied credit altogether. 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 to marginal borrowers.

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: "Fair" Prices, but "Unfair" Access (December 3, 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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