Gary-Bobo and Sophie Larribeau
"A structural econometric model of price discrimination in the French mortgage lending industry"
Keywords: mortgage loans, price discrimination, discriminating monopoly
We propose a model of discrimination in the market for mortgages. The model explains accepted loan applications and
simultaneously determines loan sizes and interest rates. A competitive and a discriminating monopoly version of the model
are proposed. Offered interest rates and loan sizes are a function of
observable borrower characteristics. The competitive model rests on a marginal condition,
reflecting contract optimality, to which a zero-profit condition is added. In contrast, the discriminating monopoly maximizes profits
under a borrower participation constraint, reflecting the availability of a rental market as an outside option.
Each version of the model is a bivariate, nonlinear model, and is estimated by standard maximum likelihood methods.
The data used for estimation is a sample of clients of a French network of mortgage lenders. We show the presence of
"social discrimination" in the data, the loan conditions depending, not only on the borrower's wage and down
payment, but also on the borrower's occupational status. Abnormally high risk premia in the competitive version of the
model suggest the presence of market power, justifying an attempt at estimating its monopolistic version.
The discriminating monopoly model estimates show that the borrowers' price-elasticity of demand for housing varies
with occupational status, and is inversely related with the lender's interest rate markups. This confirms that the lender exploits
structural differences in the preferences to discriminate, as predicted by standard theories.
Pre-publication pdf copy; Figure 1 (ppt); Figures 2 to 9; tables.