IDEAS home Printed from https://ideas.repec.org/a/wly/empleg/v13y2016i4p756-785.html
   My bibliography  Save this article

Differential Access to Capital from Financial Institutions by Minority Entrepreneurs

Author

Listed:
  • Darius Palia

Abstract

This article examines whether minority small business borrowers have the same access to loans from financial institutions as similar white borrowers. Using matching methods, I find that African‐American borrowers are rejected at an approximately 30 percent higher probability than similar white borrowers. I also find that the impact of unobservable variables has to be greater than 85 percent the impact of observable variables to show no discrimination. This bound seems to be a high number given that I have controlled for a large number of borrower, firm, and lender characteristics. No such differential effect is found for Asian and other minority borrowers. I also find equal expected default losses between African‐American and white borrowers. These results are consistent with the information‐based, laissez faire, and group hoarding theories of discrimination, and against the taste‐based theory of discrimination.

Suggested Citation

  • Darius Palia, 2016. "Differential Access to Capital from Financial Institutions by Minority Entrepreneurs," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 13(4), pages 756-785, December.
    • Handle: RePEc:wly:empleg:v:13:y:2016:i:4:p:756-785
    DOI: 10.1111/jels.12132
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/jels.12132
    Download Restriction: no
    File URL: https://libkey.io/10.1111/jels.12132?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Devah Pager, 2003. "The mark of a criminal record," Natural Field Experiments 00319, The Field Experiments Website.
    2. Judith Clarke & Nilanjana Roy & Marsha Courchane, 2009. "On the robustness of racial discrimination findings in mortgage lending studies," Applied Economics, Taylor & Francis Journals, vol. 41(18), pages 2279-2297.
    3. Chaim Fershtman & Uri Gneezy, 2001. "Discrimination in a Segmented Society: An Experimental Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 351-377.
    4. Carter, Nancy M. & Williams, Mary & Reynolds, Paul D., 1997. "Discontinuance among new firms in retail: The influence of initial resources, strategy, and gender," Journal of Business Venturing, Elsevier, vol. 12(2), pages 125-145, March.
    5. Asaf Zussman, 2013. "Ethnic Discrimination: Lessons from the Israeli Online Market for Used Cars," Economic Journal, Royal Economic Society, vol. 123(11), pages 433-468, November.
    6. Song Han, 2004. "Discrimination in Lending: Theory and Evidence," The Journal of Real Estate Finance and Economics, Springer, vol. 29(1), pages 5-46, July.
    7. Matias Busso & John DiNardo & Justin McCrary, 2014. "New Evidence on the Finite Sample Properties of Propensity Score Reweighting and Matching Estimators," The Review of Economics and Statistics, MIT Press, vol. 96(5), pages 885-897, December.
    8. Uri Gneezy & John List & Michael K. Price, 2012. "Toward an Understanding of Why People Discriminate: Evidence from a Series of Natural Field Experiments," NBER Working Papers 17855, National Bureau of Economic Research, Inc.
    9. Berger, Allen N. & Miller, Nathan H. & Petersen, Mitchell A. & Rajan, Raghuram G. & Stein, Jeremy C., 2005. "Does function follow organizational form? Evidence from the lending practices of large and small banks," Journal of Financial Economics, Elsevier, vol. 76(2), pages 237-269, May.
    10. Susan Coleman, 2002. "Borrowing Patterns for Small Firms: A Comparison by Race and Ethnicity," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 7(3), pages 77-98, Fall.
    11. Calomiris, Charles W & Kahn, Charles M & Longhofer, Stanley D, 1994. "Housing-Finance Intervention and Private Incentives: Helping Minorities and the Poor," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 634-674, August.
    12. Cavalluzzo, Ken S & Cavalluzzo, Linda C, 1998. "Market Structure and Discrimination: The Case of Small Businesses," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 771-792, November.
    13. Ohlson, Ja, 1980. "Financial Ratios And The Probabilistic Prediction Of Bankruptcy," Journal of Accounting Research, Wiley Blackwell, vol. 18(1), pages 109-131.
    14. Guido W. Imbens & Jeffrey M. Wooldridge, 2009. "Recent Developments in the Econometrics of Program Evaluation," Journal of Economic Literature, American Economic Association, vol. 47(1), pages 5-86, March.
    15. Marianne Bertrand & Sendhil Mullainathan, 2004. "Are Emily and Greg More Employable Than Lakisha and Jamal? A Field Experiment on Labor Market Discrimination," American Economic Review, American Economic Association, vol. 94(4), pages 991-1013, September.
    16. Munnell, Alicia H. & Geoffrey M. B. Tootell & Lynn E. Browne & James McEneaney, 1996. "Mortgage Lending in Boston: Interpreting HMDA Data," American Economic Review, American Economic Association, vol. 86(1), pages 25-53, March.
    17. Susan Coleman & Alicia Robb, 2009. "A comparison of new firm financing by gender: evidence from the Kauffman Firm Survey data," Small Business Economics, Springer, vol. 33(4), pages 397-411, December.
    18. Cecilia Rouse & Claudia Goldin, 2000. "Orchestrating Impartiality: The Impact of "Blind" Auditions on Female Musicians," American Economic Review, American Economic Association, vol. 90(4), pages 715-741, September.
    19. John A. List, 2004. "The Nature and Extent of Discrimination in the Marketplace: Evidence from the Field," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 49-89.
    20. Ayres, Ian & Siegelman, Peter, 1995. "Race and Gender Discrimination in Bargaining for a New Car," American Economic Review, American Economic Association, vol. 85(3), pages 304-321, June.
    21. Hubbard, R Glenn & Kuttner, Kenneth N & Palia, Darius N, 2002. "Are There Bank Effects in Borrowers' Costs of Funds? Evidence from a Matched Sample of Borrowers and Banks," The Journal of Business, University of Chicago Press, vol. 75(4), pages 559-581, October.
    22. Blanchard, Lloyd & Zhao, Bo & Yinger, John, 2008. "Do lenders discriminate against minority and woman entrepreneurs?," Journal of Urban Economics, Elsevier, vol. 63(2), pages 467-497, March.
    23. Hunter, William C & Walker, Mary Beth, 1996. "The Cultural Affinity Hypothesis and Mortgage Lending Decisions," The Journal of Real Estate Finance and Economics, Springer, vol. 13(1), pages 57-70, July.
    24. Phelps, Edmund S, 1972. "The Statistical Theory of Racism and Sexism," American Economic Review, American Economic Association, vol. 62(4), pages 659-661, September.
    25. Leandro Sepulveda & Stephen Syrett & Fergus Lyon, 2011. "Population superdiversity and new migrant enterprise: The case of London," Entrepreneurship & Regional Development, Taylor & Francis Journals, vol. 23(7-8), pages 469-497, September.
    26. Donna Marie De Carolis & Patrick Saparito, 2006. "Social Capital, Cognition, and Entrepreneurial Opportunities: A Theoretical Framework," Entrepreneurship Theory and Practice, , vol. 30(1), pages 41-56, January.
    27. repec:bla:jfinan:v:53:y:1998:i:3:p:1131-1147 is not listed on IDEAS
    28. James J. Heckman & Hidehiko Ichimura & Petra Todd, 1998. "Matching As An Econometric Evaluation Estimator," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 65(2), pages 261-294.
    29. Susan Marlow & Dean Patton, 2005. "All Credit to Men? Entrepreneurship, Finance, and Gender," Entrepreneurship Theory and Practice, , vol. 29(6), pages 717-735, November.
    30. Petersen, Mitchell A & Rajan, Raghuram G, 1994. "The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
    31. Alberto Abadie & Guido W. Imbens, 2006. "Large Sample Properties of Matching Estimators for Average Treatment Effects," Econometrica, Econometric Society, vol. 74(1), pages 235-267, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Eccles, Peter & Grout, Paul & Siciliani, Paolo & Zalewska, Anna, 2021. "The impact of machine learning and big data on credit markets," Bank of England working papers 930, Bank of England.
    2. Anna (Ania) Zalewska, 2022. "Saving with Group or Individual Personal Pension Schemes: How Much Difference Does It Make?," Management Science, INFORMS, vol. 68(7), pages 5384-5402, July.
    3. Prieger, James, 2023. "Local banking markets and barriers to entrepreneurship in minority and other areas: Does broadband availability help?," MPRA Paper 118102, University Library of Munich, Germany.
    4. Prieger, James E., 2023. "Local banking markets and barriers to entrepreneurship in minority and other areas," Journal of Economics and Business, Elsevier, vol. 124(C).
    5. Akhlaq Ahmad, 2020. "Do Equal Qualifications Yield Equal Rewards for Immigrants in the Labour Market?," Work, Employment & Society, British Sociological Association, vol. 34(5), pages 826-843, October.
    6. Dudley, Evan, 2021. "Social capital and entrepreneurial financing choice," Journal of Corporate Finance, Elsevier, vol. 70(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. David Neumark, 2018. "Experimental Research on Labor Market Discrimination," Journal of Economic Literature, American Economic Association, vol. 56(3), pages 799-866, September.
    2. Morten Størling Hedegaard & Jean-Robert Tyran, 2018. "The Price of Prejudice," American Economic Journal: Applied Economics, American Economic Association, vol. 10(1), pages 40-63, January.
    3. Katherine B. Coffman & Christine L. Exley & Muriel Niederle, 2021. "The Role of Beliefs in Driving Gender Discrimination," Management Science, INFORMS, vol. 67(6), pages 3551-3569, June.
    4. John J. Donohue III, 2005. "The Law and Economics of Antidiscrimination Law," NBER Working Papers 11631, National Bureau of Economic Research, Inc.
    5. Castillo, Marco & Petrie, Ragan & Torero, Maximo & Vesterlund, Lise, 2013. "Gender differences in bargaining outcomes: A field experiment on discrimination," Journal of Public Economics, Elsevier, vol. 99(C), pages 35-48.
    6. Song Han, 2011. "Creditor Learning and Discrimination in Lending," Journal of Financial Services Research, Springer;Western Finance Association, vol. 40(1), pages 1-27, October.
    7. Raymond Fisman & Daniel Paravisini & Vikrant Vig, 2017. "Cultural Proximity and Loan Outcomes," American Economic Review, American Economic Association, vol. 107(2), pages 457-492, February.
    8. Carlsson, Magnus & Fumarco, Luca & Rooth, Dan-Olof, 2013. "Artifactual Evidence of Discrimination in Correspondence Studies? A Replication of the Neumark Method," IZA Discussion Papers 7619, Institute of Labor Economics (IZA).
    9. J. Aislinn Bohren & Alex Imas & Michael Rosenberg, 2019. "The Dynamics of Discrimination: Theory and Evidence," American Economic Review, American Economic Association, vol. 109(10), pages 3395-3436, October.
    10. Gaddis, S. Michael, 2018. "An Introduction to Audit Studies in the Social Sciences," SocArXiv e5hfc, Center for Open Science.
    11. Fausto Hernández-Trillo & Ana Laura Martínez-Gutiérrez, 2022. "The Dark Road to Credit Applications: The Small-Business Case of Mexico," Journal of Financial Services Research, Springer;Western Finance Association, vol. 62(1), pages 1-25, October.
    12. Kudashvili, Nikoloz & Lergetporer, Philipp, 2022. "Minorities’ strategic response to discrimination: Experimental evidence," Journal of Public Economics, Elsevier, vol. 208(C).
    13. Bryson, Alex & Chevalier, Arnaud, 2015. "Is there a taste for racial discrimination amongst employers?," Labour Economics, Elsevier, vol. 34(C), pages 51-63.
    14. Beck, T.H.L. & Behr, P. & Madestam, A., 2011. "Sex and Credit : Is There a Gender Bias in Microfinance?," Other publications TiSEM 65849ab0-04f2-4dc9-9824-3, Tilburg University, School of Economics and Management.
    15. Hinnerich, Björn Tyrefors & Höglin, Erik & Johannesson, Magnus, 2011. "Ethnic Discrimination in High School Grading: Evidence from a Field Experiment," SSE/EFI Working Paper Series in Economics and Finance 733, Stockholm School of Economics, revised 27 Jun 2011.
    16. Tjaden, Jasper Dag & Schwemmer, Carsten & Khadjavi, Menusch, 2018. "Ride with Me - Ethnic Discrimination, Social Markets and the Sharing Economy," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 34(4), pages 418-432.
    17. Thorsten Beck & Patrick Behr & Andreas Madestam, 2011. "Sex and Credit: Is There a Gender Bias in Lending?," Working Papers 411, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    18. Brit Grosskopf & Graeme Pearce, 2020. "Do You Mind Me Paying Less? Measuring Other-Regarding Preferences in the Market for Taxis," Management Science, INFORMS, vol. 66(11), pages 5059-5074, November.
    19. Marianne Bertrand & Esther Duflo, 2016. "Field Experiments on Discrimination," NBER Working Papers 22014, National Bureau of Economic Research, Inc.
    20. Cordoba, Juan C. & Isojärvi, Anni & Li, Haoran, 2020. "Equilibrium Unemployment: The Role Of Discrimination," ISU General Staff Papers 202011140800001116, Iowa State University, Department of Economics.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:empleg:v:13:y:2016:i:4:p:756-785. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1111/(ISSN)1740-1461 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.