Group reputation and persistent (or permanent) discrimination in credit markets

Belonging to a group (i.e. industry, geographic area, ethnic group) of borrowers seems to play a crucial role in determining credit availability and interest rates. In this paper, we give a rationale for this phenomenon, based on incomplete information. Assuming that groups’ quality changes over time and that banks estimate it on the basis of the past observed default rates, a result of persistent group discrimination is derived. If group reputation and high interest rates affect the firms’ real quality by hampering the development of entrepreneurial skills or by inducing good firms to migrate, the initial discrimination may even cause permanent effects on the economy.