Julián Costas-Fernández
Eleonora Patacchini
Jorgen Harris
Marco Battaglini
Ricardo Fernholz
Alberto Bisin
Jess Benhabib
Cian Ruane
Pete Klenow
Mark Bils
Peter Hull
Will Dobbie
David Arnold
Eric Zwick
Owen Zidar
Matt Smith
Ansgar Walther
Tarun Ramadorai
Paul Goldsmith-Pinkham
Andreas Fuster
Ellora Derenoncourt
Golvine de Rochambeau
Vinayak Iyer
Jonas Hjort
Elena Simintzi
Paige Ouimet
Holger Mueller
Pablo Garriga
Gabriel Ulyssea
Costas Meghir
Pinelopi Koujianou Goldberg
Rafael Dix-Carneiro
Alessandro Toppeta
Áureo de Paula
Orazio Attanasio
Seth Zimmerman
Joseph Price
Valerie Michelman
Camille Semelet
Anne Brockmeyer
Pierre Bachas
Santiago Pérez
Elisa Jácome
Leah Boustan
Ran Abramitzky
Jesse Rothstein
Jeffrey T. Denning
Sandra Black
Wei Cui
Mathieu Leduc
Philippe Jehiel
Shivam Gujral
Suraj Sridhar
Attila Lindner
Arindrajit Dube
Pascual Restrepo
Łukasz Rachel
Benjamin Moll
Kirill Borusyak
Michael McMahon
Frederic Malherbe
Gabor Pinter
Angus Foulis
Saleem Bahaj
Stone Centre
Phil Thornton
James Baggaley
Xavier Jaravel
Richard Blundell
Parama Chaudhury
Dani Rodrik
Alan Olivi
Vincent Sterk
Davide Melcangi
Enrico Miglino
Fabian Kosse
Daniel Wilhelm
Azeem M. Shaikh
Joseph Romano
Magne Mogstad
Suresh Naidu
Ilyana Kuziemko
Daniel Herbst
Henry Farber
Lisa Windsteiger
Ruben Durante
Mathias Dolls
Cevat Giray Aksoy
Angel Sánchez
Penélope Hernández
Antonio Cabrales
Wendy Carlin
Suphanit Piyapromdee
Garud Iyengar
Willemien Kets
Rajiv Sethi
Ralph Luetticke
Benjamin Born
Amy Bogaard
Mattia Fochesato

Predictably unequal? The effect of machine learning on credit markets

What is this research about and why did you do it?

The use of machine learning in credit allocation should allow lenders to better extend credit, but the shift from traditional to machine learning lending models may have important distributional effects for consumers. Our study analyzes the effect of machine learning on mortgage lending in the US. It finds that machine learning would offer lower rates to racial groups who already benefited from advantageous rates under the traditional model thus exacerbating distributional effects, but it would also benefit disadvantaged groups by enabling them to obtain a mortgage in the first place.

How did you answer this question?

We build simple theoretical frameworks to better understand the issues involved, and empirically estimate the likely impacts using a large administrative dataset from the US mortgage market, comprising about 10 million mortgage loans made between 2009 and 2013. In this setting, we compare the predictions that a hypothetical lender would make when using traditional statistics (e.g. standard Logit models) to those when using supervised machine learning techniques such as the Random Forest and XGBoost.

What did you find?

Figure 1 shows one of our key results. On the horizontal axis is the change in the log predicted default probability as lenders move from traditional technology (“Logit”) to machine learning (“Random Forest”). On the vertical is the cumulative share of borrowers from each racial group that experience a given level of change. Borrowers to the left of the solid vertical line are “winners” who are classed as less risky by the more sophisticated algorithm than by the traditional model. About 65% of White Non-Hispanic and Asian borrowers win, compared with about 50% of Black and Hispanic borrowers. The gains from new technology are therefore skewed in favour of racial groups that already enjoy socio-economic advantages.

The paper goes further in showing that these effects are driven mostly by the flexibility of new technology, as opposed to by machine learning algorithms’ ability to essentially proxy for, or triangulate, borrowers’ race. We also decompose the equilibrium effects of changes in statistical technology in a model of competitive credit provision.

What implications does this have for the study on wealth concentration or economic inequality?

Our research has taken a first step towards a deeper understanding of the problems associated with the widespread adoption of new machine learning technologies. In the US mortgage market, we find that concerns about unequal effects are indeed valid. Perhaps more importantly, however, we lay out a framework for assessing and decomposing such effects, which can be applied beyond our dataset.

What are the next steps in your agenda?

Further exploration of how technological innovation in finance can affect inequality.


This paper can be cited as follows: Fuster, A., Goldsmith-Pinkham, P., Ramadorai, T., and Walther, A. (2022) "Predictably unequal? The effects of machine learning on credit markets." The Journal of Finance, 77(1), pp. 5-47.

About the authors


Related Content

expand icon


expand icon

Education materials