Measuring Bias in Consumer Lending

Loan Prospecting and the Loss of Soft Information

Will Dobbie, Andres Liberman, Daniel Paravisini and Vikram Pathania

The Review of Economic Studies, 2021, vol. 88, issue 6, 2799-2832

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; G41; J15; J16 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Related works:
Working Paper: 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:oup:restud:v:88:y:2021:i:6:p:2799-2832.

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