A Model of Redlining

We develop a model of mortgage redlining which captures the dynamic information gathering which is implied by the use of appraisals in mortgage granting. In our model, the precision of appraisals depends on the quantity of previous home sales. In turn, the precision of appraisals influences current home sales, since when appraisals are inaccurate, lenders require larger down payments. There is thus a dynamic information externality in which past purchases influence current purchases. As a consequence, differential mortgage lending behavior will be sub-optimal and the appearance of redlining may be justifiably subject to corrective action.