Technological Innovation and Discrimination in Household Finance

Adair Morse () and Karen Pence
Additional contact information
Adair Morse: https://haas.berkeley.edu/faculty/morse-adair/

No 2020-018, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Technology has changed how discrimination manifests itself in financial services. Replacing human discretion with algorithms in decision-making roles reduces taste-based discrimination, and new modeling techniques have expanded access to financial services to households who were previously excluded from these markets. However, algorithms can exhibit bias from human involvement in the development process, and their opacity and complexity can facilitate statistical discrimination inconsistent with antidiscrimination laws in several aspects of financial services provision, including advertising, pricing, and credit-risk assessment. In this chapter, we provide a new amalgamation and analysis of these developments, identifying five gateways whereby technology induces discrimination to creep into financial services. We also consider how these technological changes in finance intersect with existing discrimination and data privacy laws, leading to our contribution of four frontlines of regulation. Our analysis concludes that the net effect of innovation in technological finance on discrimination is ambiguous and depends on the future choices made by policymakers, the courts, and firms.

Keywords: Discrimination; Fair lending; Statistical discrimination; FinTech; Taste-based preferences; Algorithmic decision-making; proxy variables; Big data (search for similar items in EconPapers)
JEL-codes: G21 G28 K38 O33 (search for similar items in EconPapers)
Pages: 29 p.
Date: 2020-02-20
New Economics Papers: this item is included in nep-big, nep-ore and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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https://www.federalreserve.gov/econres/feds/files/2020018pap.pdf (application/pdf)

Related works:
Chapter: Technological Innovation and Discrimination in Household Finance (2021)
Working Paper: Technological Innovation and Discrimination in Household Finance (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2020-18

DOI: 10.17016/FEDS.2020.018

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