Racial disparities in the small business loan market
Rakshit A. Peterson J.
2024Taylor and Francis Ltd.
Journal of Small Business Management
2024#62Issue 21004 - 1029 pp.
We investigate patterns of racial bias in small business loans denial rates in the US across different credit risk scores. Using data constructed from the 1998 Survey of Small Business Finances and Kauffman Firm Survey, we find disparities in loan approval ratings between Black and White entrepreneurs in intermediate risk categories, but not for the best and worst categories. We explain these findings with a simple and generalizable statistical discrimination model where banks hold prior beliefs of repayment probability based on the applicant’s group and observe noisy signals of creditworthiness. Our model predicts that differences in loan denial rates across groups are more pronounced at middle range values and disappear at very high and very low credit scores. Identifying the likely cause of differential treatment in the market is an important first step in improving representation of minority groups as entrepreneurs. Our findings contribute to this critical effort by delineating the nature of racial bias in the credit market and informing remediation policies.
access to credit , entrepreneurs , race , Small business loans , statistical discrimination
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Graduate School of Business, Nazarbayev University, Kazakhstan
Department of Economics and Finance, Louisiana Tech University, United States
Graduate School of Business
Department of Economics and Finance
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