Competition, Small Business Financing, and Discrimination: Evidence from a New Survey

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Abstract
A large body of literature investigates discrimination in home mortgage markets. In contrast, little is known about variation in access to credit across demographic groups for small businesses. This paper examines some of the factors that influence differences in small business credit market experiences across demographic groups. We analyze credit applications, loan denials, and interest rates paid across gender, race and ethnicity of small business owners. In addition, we analyze data gathered from small business owners who said they did not apply for credit because they believed that their application would have been turned down. This set of analyses, in combination with important new information on the personal credit history of the principal owner, the business credit history of the firm, a rich set of additional explanatory variables, and information on the competitiveness of local banking markets, helps us to understand better the sources of observed differentials in the credit market experiences of small business operators across demographic groups. The analyses reveal substantial unexplained differences in denial rates between African American and white-male owned firms. Moreover, consistent with Becker?s classic theories (1957), we find evidence that the level of lender market competition in the firm?s local banking market mitigates these differences.