About the Speaker:

Walter expects to receive his Phd in Economics in June 2009 from The Wharton School, University of Pennsylvania. In 2006, he was awarded the Amy Morse Public Policy Prize. He received an MA in international relations and a BA in Economics (with honors) from the University of Chicago.  His areas of interest are in applied economics, applied microeconomic theory, public economics and industrial organization.  His thesis advisor is Professor  Kent Smetters.

Abstract:

Can market competition efficiently eliminate discrimination? This paper uses unique data from an online auction credit market, www.Prosper.com, where peer-to-peer loans are made to borrowers who are identifiable by race, to study how competition forms prices in the existence of discrimination. We adapt Becker’s work on discrimination to a competitive auction price-formation model from Pesendorfer and Swinkels, and show that in this context the impact of competition on marginal discrimination can be directly identified. We find that in the market for online lending, Blacks have greater difficulty obtaining credit and pay more for credit, but are helped by competition to a greater degree than Whites, consistent with a model of marginal discrimination. However, using preliminary loan payment data, we also find that Black borrowers, while paying more, are actually undercharged for the additional amount of risk they pose. A unifying explanation suggests that when price formation depends on market information aggregation, any type of discrimination reduces the quality of information, preventing the market from attaining efficient outcomes. Highly competitive, disaggregated markets of the type found in peer-to-peer activity may find it difficult to overcome these barriers.

Reservation:

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