Racial Disparities in Small Business Lending

25 Pages Posted: 7 Apr 2021 Last revised: 27 Apr 2021

See all articles by Tao Chen

Tao Chen

Nanyang Business School, Nanyang Technological University

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Bo Sun

Board of Governors of the Federal Reserve System

Date Written: April 7, 2021

Abstract

Institutional racism can manifest itself in banking relationships in generational ways. In this article, we study the magnitude and origins of racial disparities in the U.S. small business credit market. Exploiting a unique dataset containing rich loan contract information, including firm and lender characteristics, we document sizable racial differentials in small business lending, measured by loan denial rates and interest rates between Black-owned businesses and otherwise observationally identical non-minority-owned businesses. Such racial disparities are most pronounced in areas associated with severe racial bias against African Americans. Crucially, we show that, consistent with Becker (1957) theory of taste-based discrimination, an exogenous intensification of credit competition has a quantitatively large effect in reducing racial disparities in small business lending. Our findings shed new light on the origins of racial disparities in small business credit markets, pointing to institutional racism that could foreshadow long-term ramifications for racial inequality.

Keywords: Racial disparities, Small business lending, Interstate branching deregulation

JEL Classification: G21, G32, G3

Suggested Citation

Chen, Tao and Lin, Chen and Sun, Bo, Racial Disparities in Small Business Lending (April 7, 2021). Nanyang Business School Research Paper No. 21-11, Available at SSRN: https://ssrn.com/abstract=3821442 or http://dx.doi.org/10.2139/ssrn.3821442

Tao Chen (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Bo Sun

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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