Technological Innovation and Discrimination in Household Finance

29 Pages Posted: 18 May 2020

See all articles by Adair Morse

Adair Morse

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER)

Karen M. Pence

Board of Governors of the Federal Reserve System; Federal Reserve Board

Multiple version iconThere are 3 versions of this paper

Date Written: February 20, 2020

Abstract

Technology has changed how discrimination manifests itself in financial services. Replacing human discretion with algorithms in decision-making roles reduces taste-based discrimination, and new modeling techniques have expanded access to financial services to households who were previously excluded from these markets. However, algorithms can exhibit bias from human involvement in the development process, and their opacity and complexity can facilitate statistical discrimination inconsistent with antidiscrimination laws in several aspects of financial services provision, including advertising, pricing, and credit-risk assessment. In this chapter, we provide a new amalgamation and analysis of these developments, identifying five gateways whereby technology induces discrimination to creep into financial services. We also consider how these technological changes in finance intersect with existing discrimination and data privacy laws, leading to our contribution of four frontlines of regulation. Our analysis concludes that the net effect of innovation in technological finance on discrimination is ambiguous and depends on the future choices made by policymakers, the courts, and firms.

Keywords: Discrimination; Fair lending; Statistical discrimination; FinTech; Taste-based preferences; Algorithmic decision-making; Proxy variables; Big data

JEL Classification: G21; G28; K38; O33

Suggested Citation

Morse, Adair and Pence, Karen M., Technological Innovation and Discrimination in Household Finance (February 20, 2020). FEDS Working Paper No. 2020-018. Available at SSRN: https://ssrn.com/abstract=3601242

Adair Morse (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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Karen M. Pence

Board of Governors of the Federal Reserve System ( email )

Washington, DC 20551
United States
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Federal Reserve Board ( email )

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HOME PAGE: http://https://www.federalreserve.gov/econres/karen-m-pence.htm

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