As migration across countries and continents has continued to rise, societies must ask whether these new members of their communities are suffering from lower access to finance due to a trust gap arising from cultural differences. There is ample evidence showing that cultural differences have an important effect on economic outcomes, and they do so through two different channels. First, there could be a dislike toward counterparties who have a different cultural background, akin to taste-based discrimination. Second, cultural differences could give rise to informational frictions, reminiscent of statistical discrimination. Identifying and disentangling these two channels empirically is very hard.
In “Culture, Lending Relationships, and the Cost of Credit,” Giorgio Albareto, Maddalena Galardo, Paolo Emilio Mistrulli, and Bianca Sorvillo study how cultural differences affect the functioning of credit markets. Specifically, they investigate whether migrants to Italy pay more for credit than natives after controlling for several factors that could otherwise have an impact on credit supply. Using granular data, the authors find that, on average, migrants pay 36 basis points more for credit relative to natives. There is cross-sectional heterogeneity across different migrant groups: migrants from Asia pay the highest rates, while migrants from other European Union countries pay the lowest ones. While interesting, these results on their own cannot help us conclude whether the mechanism generating them is taste-based or statistical discrimination. To do so, the authors track the interest rates charged to subsequent loans as the borrower-lender relationship matures over time. In a long-term relationship, a lender should be able to obtain both soft and hard information about the borrower. However, if loan officers practice taste-based discrimination against borrowers with a culturally different background than their own, interest rate differentials on repeat loans would not be affected by the additional information collected by a lender. The results are more consistent with statistical discrimination: the interest rate differential between migrants and natives narrows as the borrower-lender relationship evolves over time.
Spotlight by Andrew Ellul
Photos courtesy of Giorgio Albareto, Maddalena Galardo, Paolo Emilio Mistrulli, and Bianca Sorvillo