Market Structure and Discrimination: The Case of Small Businesses

This paper examines bank market structure to draw inferences concerning the role of discrimination in credit markets for small businesses. The authors analyze credit application and denial rates, loans outstanding, and interest rates across demographic groups. This set of variables, in combination with information on local bank market structure, helps them distinguish among borrower preferences, lender tastes, and inadequate lender information as likely causes of differences in credit market experiences of small business operators from distinct demographic groups. The authors find that white men and women can expect similar treatment in credit markets, with some benefits to female-owned firms located in concentrated banking markets. Minorities, by contrast, fare worse than whites. Moreover, by appealing to Becker's (1957) classic theories, we find some clear evidence to support the view that prejudicial discrimination is at least partly to blame.