Market Structure and Discrimination: The Case of Small Businesses

Cavalluzzo, Ken S.; Cavalluzzo, Linda

doi:10.2307/2601128

Cited by 260 publications

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“…In the same vein, Blanchard, Zhao, and Yinger (2008) find that black-owned businesses pay relatively higher interest rates when they borrow from financial firms. Cavalluzzo and Cavalluzzo (1998) report a similar finding for Asian and…”

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confidence: 73%

The Financial Power of the Powerless: Socio-Economic Status and Interest Rates Under Partial Rule of Law

Kuran

Rubin

2014

SSRN Journal

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Abstract. In advanced economies interest rates generally vary inversely with the borrower's socio-economic status, because status tends to depend inversely on default risk. Both of these relationships depend critically on the impartiality of the law. Specifically, they require a lender to be able to sue a recalcitrant borrower in a sufficiently impartial court. Where the law is markedly biased in favor of elites, privileged socio-economic classes will pay a surcharge for capital. This is because they pose a greater risk to lenders who have limited means of punishing them. Legal power, as measured by privileges before the law, thus undermines financial power, which is the capacity to borrow cheaply. Developing the underlying theory, this paper also tests it through a data set consisting of judicial records from Ottoman Istanbul, 1602-1799. Pre-modern Istanbul offers an ideal testing ground because rule of law existed but was highly partial. Court data show that titled elites, men, and Muslims all paid higher interest rates conditional on various loan characteristics. A general implication is that elites can benefit from instituting impartially enforced rules in financial markets. The beginnings of legal modernization in the Ottoman Empire included the establishment of relatively impartial commercial courts.

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confidence: 73%

The Financial Power of the Powerless: Socio-Economic Status and Interest Rates Under Partial Rule of Law

Kuran

Rubin

2014

SSRN Journal

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“…Studies for the U.S. have found substantial demographic differences related to the ethnicity of the entrepreneur in small firms' experiences in the credit market, even after controlling for a broad set of characteristics of the firm and owner (Blanchflower et al, 2003;Cavalluzzo et al, 2002;Cavalluzzo and Wolken, 2005), competition in the local banking market (Cavalluzzo and Cavalluzzo, 1998) and local geography (Bostic and Lampani, 1999). Blackowned firms pay significantly higher interest rates and are more likely to be denied credit than white-owned firms, even after taking into account differences in creditworthiness and other factors (Blanchflower et al, 2003).…”

Section: Literature Review and Hypothesesmentioning

confidence: 99%

The role of demographics in small business loan pricing

Neuberger

Räthke-Döppner

2014

Small Bus Econ

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractTo sustain growth in an aging economy, it is important to ease the financing of small firms by bank loans. Using bank internal data of small business loans in Germany, we examine the determinants of loan rates in the period 1995-2010. Beyond characteristics of the firm, the loan contract, and the lending relationship, demographic aspects matter. However, collateral and relationship lending play a larger role in loan pricing than the entrepreneur's age. Banks do not seem to discriminate older borrowers by higher loan rates. We rather find statistical discrimination of younger borrowers because of their lower wealth. Single entrepreneurs obtain cheaper loans than married ones. Firms in peripheral regions with low population density are disadvantaged by higher loan rates compared to those in agglomerated regions.JEL classification: D14, E43, G21, J14, L26

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“…The disparate treatment of women entrepreneurs in loan granting is also widely documented in the literature (Blanch ower, Levine and Zimmerman, 2003;Cavalluzzo and Cavalluzzo, 1998;Cavalluzzo and Wolken, 2005;Alesina, Lotti and Mistrulli, 2008). Beyond higher probability of denial, This is all the more important because loan size is key to growth and survival of small business projects.…”

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confidence: 91%

Subjectivity in credit allocation to micro-entrepreneurs: evidence from Brazil

Agier

Szafarz

2012

Small Bus Econ

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This paper estimates the impact of loan officers' subjectivity on microcredit granting by exploiting an exceptionally detailed database from a Brazilian microfinance institution. Loan officers collect field data, meet with applicants, and make recommendations to the credit committee that in turn has the final say on both loan approval and loan size. The loan officers' subjectivity is captured through the lens of disparate treatment based on gender. Indeed, our estimations show that an unfair gender gap is observed in loan size, and that this gap is almost exclusively attributable to the loan officers. We interpret this finding as evidence that, despite monitoring and wage incentivization, microcredit officers keep letting their subjective preferences interfere with loan granting. We conclude by suggesting alternative means to curb subjectivity in credit allocation to micro-entrepreneurs. AbstractThis paper estimates the impact of loan o cers' subjectivity on microcredit granting by exploiting an exceptionally detailed database from a Brazilian micro nance institution. Loan o cers collect eld data, meet with applicants, and make recommendations to the credit committee that in turn has the nal say on both loan approval and loan size. The loan o cers' subjectivity is captured through the lens of disparate treatment based on gender. Indeed, our estimations show that an unfair gender gap is observed in loan size, and that this gap is almost exclusively attributable to the loan o cers. We interpret this nding as evidence that, despite monitoring and wage incentivization, microcredit o cers keep letting their subjective preferences interfere with loan granting. We conclude by suggesting alternative means to curb subjectivity in credit allocation to micro-entrepreneurs.

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Market Structure and Discrimination: The Case of Small Businesses

Cited by 260 publications

References 0 publications

The Financial Power of the Powerless: Socio-Economic Status and Interest Rates Under Partial Rule of Law

The Financial Power of the Powerless: Socio-Economic Status and Interest Rates Under Partial Rule of Law

The role of demographics in small business loan pricing

Subjectivity in credit allocation to micro-entrepreneurs: evidence from Brazil

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