Measuring bias in consumer lending

Will Dobbie, Andres Liberman, Daniel Paravisini and Vikram S. Pathania

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: discrimination; consumer credit (search for similar items in EconPapers)
JEL-codes: J15 J16 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2021-11-01
New Economics Papers: this item is included in nep-ban, nep-cwa and nep-isf
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published in Review of Economic Studies, 1, November, 2021, 88(6), pp. 2799 - 2832. ISSN: 0034-6527

Downloads: (external link)
http://eprints.lse.ac.uk/104984/ Open access version. (application/pdf)

Related works:
Journal Article: Measuring Bias in Consumer Lending (2021)
Working Paper: Measuring Bias in Consumer Lending (2019)
Working Paper: Measuring Bias in Consumer Lending (2018)
Working Paper: Measuring Bias in Consumer Lending (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:104984

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