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æThe Poor Pay MoreÆ: Another Case of Discrimination in the Consumer Credit Market?

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  • Ingrid Gr÷▀l

    (Department of Economics and Politics, University of Hamburg, Germany)

Abstract

Within a theoretical framework the issue is explored whether income-dependent interest rates for unsecured consumer loans provide a case for discrimination. The analysis distinguishes between two types of pricing models and reveals how each type can provoke discrimination. A bank that seeks to realize on average the safe rate of return may give rise to statistical discrimination if it associates lower income households with higher risks without using careful screening procedures. A bank that seeks to maximize the rate of return over equity to be achieved from any individual client may give rise to pro?t-based discrimination if it uses the return over equity of higher income households as a benchmark, and if lower income households are locked into their market segment.

Suggested Citation

  • Ingrid Gr÷▀l, 2005. "æThe Poor Pay MoreÆ: Another Case of Discrimination in the Consumer Credit Market?," Homo Oeconomicus, Institute of SocioEconomics, vol. 23, pages 381-400.
    • Handle: RePEc:hom:homoec:v:23:y:2005:p:381-400
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