Racial Disparities in Small Business Lending
25 Pages Posted: 7 Apr 2021 Last revised: 27 Apr 2021
Date Written: April 7, 2021
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: Suggested Citation