Predictably Unequal? The Effects of Machine Learning on Credit Markets

94 Pages Posted: 17 Nov 2017 Last revised: 1 Oct 2020

See all articles by Andreas Fuster

Andreas Fuster

Swiss National Bank - Financial Stability; Centre for Economic Policy Research (CEPR)

Paul Goldsmith-Pinkham

Federal Reserve Banks - Federal Reserve Bank of New York

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Ansgar Walther

Imperial College London; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2020

Abstract

Innovations in statistical technology have sparked concerns about distributional impacts across categories such as race and gender. Theoretically, as statistical technology improves, distributional consequences depend on how changes in functional forms interact with cross-category distributions of observable characteristics. Using detailed administrative data on US mortgages, we embed the predictions of traditional logit and more sophisticated machine-learning default prediction models into a simple equilibrium credit model. Machine learning models slightly increase credit provision overall, but increase rate disparity between and within groups; effects mainly arise from flexibility to uncover structural relationships between default and observables, rather than from triangulation of excluded characteristics. We predict that Black and Hispanic borrowers are disproportionately less likely to gain from new technology.

Keywords: machine learning, credit, mortgages, disparate impact

JEL Classification: G21, G28, G50, R30

Suggested Citation

Fuster, Andreas and Goldsmith-Pinkham, Paul and Ramadorai, Tarun and Walther, Ansgar, Predictably Unequal? The Effects of Machine Learning on Credit Markets (October 1, 2020). Available at SSRN: https://ssrn.com/abstract=3072038 or http://dx.doi.org/10.2139/ssrn.3072038

Andreas Fuster

Swiss National Bank - Financial Stability ( email )

Boersenstrasse 15
Zurich, CH-8022
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Paul Goldsmith-Pinkham

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Tarun Ramadorai (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.tarunramadorai.com

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Ansgar Walther

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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