Sherrill Shaffer is from the Federal Reserve Bank of Philadelphia. This note embodies the views of the author and does not necessarily represent the views of the Federal Reserve Bank of Philadelphia or of the Federal Reserve System. The author is grateful to Loretta Mester, René Stulz, and two anonymous referees for helpful comments.
Evidence of Discrimination in Lending: An Extension
Article first published online: 30 APR 2012
1996 The American Finance Association
The Journal of Finance
Volume 51, Issue 4, pages 1551–1554, September 1996
How to Cite
SHAFFER, S. (1996), Evidence of Discrimination in Lending: An Extension. The Journal of Finance, 51: 1551–1554. doi: 10.1111/j.1540-6261.1996.tb04080.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
We generalize the model of Ferguson and Peters (1995) to allow for unequal recovery rates in the event of default by majority borrowers versus minority borrowers. This simple extension has two direct implications: (i) a uniform credit policy, as defined by Ferguson and Peters, entails cross-subsidization across groups; and (ii) it is possible for a profit-maximizing (and therefore economically nondiscriminatory) lending policy to generate lower average default rates among minority borrowers than among majority borrowers.