Differential Access to Capital from Financial Institutions by Minority Entrepreneurs

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.