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Measuring bias in consumer lending

Dobbie, Will, Liberman, Andres, Paravisini, Daniel and Pathania, Vikram S. (2021) Measuring bias in consumer lending. Review of Economic Studies, 88 (6). 2799 - 2832. ISSN 0034-6527

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Identification Number: 10.1093/restud/rdaa078

Abstract

This article tests for bias in consumer lending using administrative data from a high-cost lender in the U.K. We motivate our analysis using a new principal-agent model of bias where loan examiners are incentivized to maximize a short-term outcome, not long-term profits, leading to bias against illiquid applicants at the margin of loan decisions. We identify the profitability of marginal applicants using the quasi-random assignment of loan examiners, finding significant bias against immigrant and older applicants when using the firm’s preferred measure of long-run profits but not when using the short-run measure used to evaluate examiner performance. In this case, market incentives based on characteristics that vary across groups lead to inefficient group-based bias.

Item Type: Article
Official URL: https://academic.oup.com/restud
Additional Information: © 2021 The Authors
Divisions: Finance
Subjects: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
H Social Sciences > HT Communities. Classes. Races
JEL classification: J - Labor and Demographic Economics > J1 - Demographic Economics > J15 - Economics of Minorities and Races; Non-labor Discrimination
J - Labor and Demographic Economics > J1 - Demographic Economics > J16 - Economics of Gender; Non-labor Discrimination
Date Deposited: 04 Jun 2020 16:24
Last Modified: 26 Nov 2021 09:24
URI: http://eprints.lse.ac.uk/id/eprint/104984

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