Size Matters: The Impact of Loan Size on Measures of Disparate Treatment toward Minority Entrepreneurs in the Small Firm Credit Market

• Published in: Entrepreneurship research journal 2018-10, Vol.8 (4), p.3
• Main Authors: Jackson, William E., Marino, Louis, Naidoo, Jefrey S., Tucker, Reginald
• Format: Article
• Language: English
• Subjects: disparate treatment; Entrepreneurs; Loans; minority entrepreneurs; Minority owned businesses; public policy; Small business loans; small firm credit markets
• ISSN: 2157-5665; 2194-6175; 2157-5665
• DOI: 10.1515/erj-2018-0129

This paper reports the results of investigating differences in measures of disparate treatment, or discrimination, in the small firm credit market that are related to loan size. Because small loans tend to be less profitable to originate than large loans, the competitive nature of the product markets for large and small loans may be quite different. Becker suggests that more competition will reduce the level of discrimination in a market. And some market-based evidence of Becker’s competition effect has been reported in the literature on discrimination in the small firm credit market. We add to this literature by considering the impact of differing levels of competition across products (i.e. small versus large loans). The results for our small loan subsample exhibit strong evidence of disparate treatment, or discrimination, against African-American entrepreneurs. However, the results for the large loan subsample are statistically different. In particular, for the large loan subsample there is no significant evidence of discrimination, or disparate treatment, against African-American entrepreneurs applying for business loans. This strongly suggests that the current evidence of discrimination in the small firm credit market needs to be reconsidered for public policy application purposes.