Abstract

http://ssrn.com/abstract=1133826
 
 

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Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Experiment


Dean S. Karlan


Yale University; Innovations for Poverty Action; Massachusetts Institute of Technology (MIT) - Abdul Latif Jameel Poverty Action Lab; National Bureau of Economic Research (NBER)

Jonathan Zinman


Dartmouth College; Innovations for Poverty Action; Jameel Poverty Action Lab; National Bureau of Economic Research (NBER)

March 2007

CEPR Discussion Paper No. DP6182

Abstract:     
Information asymmetries are important in theory but difficult to identify in practice. We estimate the presence and importance of adverse selection and moral hazard in a consumer credit market using a new field experiment methodology. We randomized 58,000 direct mail offers issued by a major South African lender along three dimensions: 1) an initial offer interest rate featured on a direct mail solicitation; 2) a contract interest rate that was revealed only after a borrower agreed to the initial offer rate; and 3) a dynamic repayment incentive that extended preferential pricing on future loans to borrowers who remained in good standing. These three randomizations, combined with complete knowledge of the Lender's information set, permit identification of specific types of private information problems. Our setup distinguishes adverse selection from moral hazard effects on repayment, and thereby generates unique evidence on the existence and magnitudes of specific credit market frictions. We find evidence of moral hazard and weaker evidence for adverse selection. A rough calibration suggests that perhaps 7% to 16% of default is due to asymmetric information problems. Asymmetric information may help explain the prevalence of credit constraints even in a market that specializes in financing high-risk borrowers at very high rates.

Number of Pages in PDF File: 61

Keywords: Adverse selection, credit markets, development finance, field experiment, Information asymmetries, microfinance, moral hazard

JEL Classification: C9, D8, G2, G3, O1

working papers series





Date posted: May 20, 2008  

Suggested Citation

Karlan, Dean S. and Zinman, Jonathan, Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Experiment (March 2007). CEPR Discussion Paper No. DP6182. Available at SSRN: http://ssrn.com/abstract=1133826

Contact Information

Dean S. Karlan (Contact Author)
Yale University ( email )
Box 208269
New Haven, CT 06520-8269
United States
Innovations for Poverty Action ( email )
New Haven, CT
United States
Massachusetts Institute of Technology (MIT) - Abdul Latif Jameel Poverty Action Lab ( email )
E60-246
77 Massachusetts Avenue
Cambridge, MA 02139
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Jonathan Zinman
Dartmouth College ( email )
Hanover, NH 03755
United States
603-646-0075 (Phone)
HOME PAGE: http://www.dartmouth.edu/~jzinman/
Innovations for Poverty Action
New Haven, CT
United States
Jameel Poverty Action Lab
E60-246
77 Massachusetts Avenue
Cambridge, MA 02139
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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