Ken S. Cavalluzzo

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

We analyze credit applications, loan denials, and interest rates paid by small businesses across owner gender, race, and ethnicity. In addition, we examine data from owners who said they did not apply for credit because they believed that their applications would have been turned down. After controlling for a rich set of explanatory variables, including personal and business credit histories, substantial differences in denial rates between firms owned by African Americans and white males remain. Moreover, consistent with Beckers classic theories (1957), we find evidence that increases in competition in the firms local banking market reduces these differences.

Market Structure and Discrimination: The Case of Small Businesses

This paper examines bank market structure to draw inferences concerning the role of discrimination in credit markets for small businesses. The authors analyze credit application and denial rates, loans outstanding, and interest rates across demographic groups. This set of variables, in combination with information on local bank market structure, helps them distinguish among borrower preferences, lender tastes, and inadequate lender information as likely causes of differences in credit market experiences of small business operators from distinct demographic groups. The authors find that white men and women can expect similar treatment in credit markets, with some benefits to female-owned firms located in concentrated banking markets. Minorities, by contrast, fare worse than whites. Moreover, by appealing to Beckers (1957) classic theories, we find some clear evidence to support the view that prejudicial discrimination is at least partly to blame.

Small Business Loan Turndowns, Personal Wealth and Discrimination

We examine the impact of personal wealth on small business loan turndowns across demographic groups. Information on home ownership, home equity, and personal net worth, in combination with a rich set of explanatory variables, furthers our understanding of the credit market experiences of small businesses across demographic groups. We find substantial unexplained differences in denial rates between African-American-, Hispanic-, Asian-, and white-owned firms. We find that greater personal wealth is associated with a lower probability of loan denial. However, even after controlling for personal wealth, large differences in denial rates across demographic groups remain.

Competition, small business financing, and discrimination: evidence from a new survey

Using data from the 1993 National Survey of Small Business Finances, we examine some of the factors influencing 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 local bank market structure, helps us to understand better the sources of observed differentials in the credit market experiences of small business operators across demographic groups. Credit market experiences often differ markedly among demographic groups. However, so do the characteristics of firms and owners. Results of our multivariate analyses show that many of the factors we consider help to explain the observed differences in credit market experiences However, even after controlling for a large number of firm and owner characteristics, substantial differences often remained. There was also evidence that some of the differentials were associated with the degree of lender market concentration in the firms local area.

Competition, fee-for-service requirements, and government performance: evidence on the Federal Reserve

Abstract This paper examines the impact of competition and fee-for-service requirements on the efficiency and quality of government services. Using internal cost and quality data on the United States Federal Reserve, I find that fee-for-service requirements alone were not enough to motivate performance improvements. Costs went down only in the single Fed service (forward check-clearing) that also faced vigorous product-market competition, and the extent of the cost reductions was greater in more competitive markets. Importantly, the cost reductions in check-clearing were accompanied by quality improvements, with service quality positively associated with contemporaneous and subsequent costs. These results are consistent with studies on the private sector that indicate that quality improvements can increase productivity and reduce costs. Taken together, the evidence points to competition as a potential tool in the nation’s efforts to improve the performance of government services.