Evidence of Discrimination in Lending: An Extension

Sherrill Shaffer

Journal of Finance, 1996, vol. 51, issue 4, 1551-54

Abstract: The author generalizes the model of Michael F. Ferguson and Stephen R. 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: (1) a uniform credit policy, as defined by Ferguson and Peters, entails cross-subsidization across groups; and (2) 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. Copyright 1996 by American Finance Association.

Date: 1996
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