Racial Disparities in Small Business Lending

Abstract

We study the magnitude and nature 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 white-owned businesses. Such racial disparities are most pronounced in areas associated with severe racial bias against blacks. Critically, we show that an exogenous increase in bank competition due to bank deregulation has a quantitatively large effect in reducing racial disparities in small business lending, and such a reduction is primarily driven by entrant banks, as the Becker (1957) theory of racial prejudice predicts.