Thursday, October 11, 2018

Screening on criminal background and credit history

When I was at the Bureau of Economics at the FTC, we were asked by Congress whether using credit histories to price car insurance was discriminatory.  The resulting FACTA report found that:
  1. as a group, African-Americans and Hispanics tend to have lower scores than non-Hispanic whites and Asians.
  2. ...scores effectively predict risk of claims within racial and ethnic groups.
  3. The Commission could not develop an alternative scoring model that would continue to predict risk effectively, yet decrease the differences in scores among racial and ethnic groups.
As a result, banning the use of credit scores would result in insurers finding other, less good and possibly discriminatory methods of distinguishing high from low risks, like selling insurance only in low risk areas.  Good drivers living in higher risk areas would be "pooled" with other drivers living in the high risk area, and would have to pay higher rates.

 Previous studies (here and here) finds an analogous effect of preventing criminal background checks in employment, that doing so increases racial discrimination against African American men:
If employers are very averse to hiring ex-cons then they will seek to reduce this risk and one way of doing so is by not hiring any black men. As a result, a background check allows non ex-cons to distinguish themselves from the pack and to be hired. Furthermore, when background checks exist, non ex-cons know that they will not face statistical discrimination and thus have an increased incentive to invest in skills.
Also:
When the box [a criminal back ground check] is banned it’s no longer possible to cheaply level the playing field so more employers begin to statistically discriminate by offering fewer callbacks to blacks. As a result, banning the box may benefit black men with criminal records but it comes at the expense of black men without records who, when the box is banned, no longer have an easy way of signaling that they don’t have a criminal record. Sadly, a policy that was intended to raise the employment prospects of black men ends up having the biggest positive effect on white men with a criminal record.

See also Using credit history to price hospital care

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