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Measuring bias in consumer lending

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Version 2 2023-06-07, 08:56
Version 1 2023-06-07, 07:45
journal contribution
posted on 2023-06-07, 08:56 authored by Will Dobbie, Andres Liberman, Daniel Paravisini, Vikram Pathania
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.

History

Publication status

  • Published

File Version

  • Published version

Journal

Review of Economic Studies

ISSN

0034-6527

Publisher

Oxford University Press

Issue

6

Volume

88

Page range

2799-2832

Department affiliated with

  • Economics Publications

Full text available

  • No

Peer reviewed?

  • Yes

Legacy Posted Date

2020-08-21

First Open Access (FOA) Date

2022-01-13

First Compliant Deposit (FCD) Date

2020-08-21

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