Working Paper: CEPR ID: DP3302
Authors: Robert Garybobo; Sophie Larribeau
Abstract: We propose a model of discrimination in the market for mortgages. The model explains accepted loan applications and determines loan sizes and interest rates simultaneously. A competitive and a discriminating monopoly version of the model are proposed. Offered interest rates and loan sizes are a function of observable borrower characteristics. The competitive model rests on a marginal condition, reflecting contract optimality, to which a zero-profit condition is added. In contrast, the discriminating monopoly maximizes profits under a borrower participation constraint, reflecting the availability of a rental market as an outside option. Each version of the model is a bivariate, non-linear model, and is estimated by standard maximum likelihood methods. The data used for estimation is a sample of clients of a French network of mortgage lenders. We show the presence of ?social discrimination? in the data, the loan conditions depending, not only on the borrower's wage and down payment, but also on the borrower's occupational status. Abnormally high-risk premia in the competitive version of the model suggest the presence of market power, justifying an attempt at estimating its monopolistic version. The discriminating monopoly model estimates show that the borrowers' price-elasticity of demand for housing varies with occupational status, and is inversely related with the lender's interest rate markups. This confirms that the lender exploits structural differences in the preferences to discriminate, as predicted by standard theories.
Keywords: discriminating monopoly; mortgage loans; price discrimination
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market structure (competitive vs. monopolistic) (L11) | interest rates charged to borrowers (G21) |
| occupational status (J28) | price elasticity of demand for housing (R21) |
| price elasticity of demand for housing (R21) | interest rate markups (E43) |
| observable characteristics (income, down payment, occupational status) (G51) | lender's pricing strategies (G21) |
| occupational status (J28) | loan conditions (F34) |