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Testing for racial bias in business credit scores

Author

Listed:
  • Alicia Robb

    (University of Colorado at Boulder and University of California, Berkeley)

  • David T. Robinson

    (Duke University and National Bureau of Economic Research, Fuqua School of Business)

Abstract

We develop a novel empirical test of racial bias based on comparisons between forward-looking, expectations-based credit scores and backward-looking, repayment-history-based credit scores. We then test for racial bias using confidential-access data from the Kauffman Firm Survey. Businesses founded by disadvantaged minorities have much lower average business credit scores, but these scores show no evidence of racial bias. If anything, forward-looking credit-score models under-predict the rate of payment delinquency among minority-owned businesses.

Suggested Citation

  • Alicia Robb & David T. Robinson, 2018. "Testing for racial bias in business credit scores," Small Business Economics, Springer, vol. 50(3), pages 429-443, March.
    • Handle: RePEc:kap:sbusec:v:50:y:2018:i:3:d:10.1007_s11187-017-9878-2
    DOI: 10.1007/s11187-017-9878-2
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    Cited by:

    1. Ströbel, Johannes & Howell, Sabrina & Kuchler, Theresa & Snitkof, David, 2021. "Racial Disparities in Access to Small Business Credit: Evidence from the Paycheck Protection Program," CEPR Discussion Papers 16623, C.E.P.R. Discussion Papers.
    2. Sabrina T. Howell & Theresa Kuchler & David Snitkof & Johannes Stroebel & Jun Wong, 2021. "Lender Automation and Racial Disparities in Credit Access," NBER Working Papers 29364, National Bureau of Economic Research, Inc.
    3. Rachel Atkins & Lisa Cook & Robert Seamans, 2022. "Discrimination in lending? Evidence from the Paycheck Protection Program," Small Business Economics, Springer, vol. 58(2), pages 843-865, February.
    4. Ewens, Michael, 2022. "Race and Gender in Entrepreneurial Finance," SocArXiv djf8z, Center for Open Science.
    5. Greenwald, Daniel L. & Howell, Sabrina T. & Li, Cangyuan & Yimfor, Emmanuel, 2024. "Regulatory arbitrage or random errors? Implications of race prediction algorithms in fair lending analysis," Journal of Financial Economics, Elsevier, vol. 157(C).
    6. Darden, Bryan B. & Kellermanns, Franz W. & Best, Emma L., 2022. "Entrepreneurial fear of failure: Transgender versus cis-gender entrepreneurs," Journal of Business Venturing Insights, Elsevier, vol. 18(C).
    7. Doris Neuberger & Udo Reifner, 2020. "Systemic Usury and the European Consumer Credit Directive," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 89(1), pages 115-132.

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    More about this item

    Keywords

    Business credit scores; Banking·minority entrepreneurship;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities, Races, Indigenous Peoples, and Immigrants; Non-labor Discrimination
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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