Information Asymmetries in Consumer Credit Markets: Evidence from Two Payday Lending Firms
43 Pages Posted: 18 Jan 2011 Last revised: 25 Feb 2012
Date Written: September 15, 2011
Abstract
This paper tests for incentive and selection effects in a subprime consumer credit market. We estimate the incentive effect of loan size on default using sharp discontinuities in loan eligibility rules. This allows us to estimate the magnitude of selection from the cross-sectional correlation between loan size and default. We find evidence of advantageous incentives and adverse selection. For a given borrower, we estimate that a $100 increase in loan size decreases the probability of default by 3.7 to 4.2 percentage points, a 20 to 23 percent decrease from the mean default rate. The incentive effect is more than offset by adverse selection into larger loans. Borrowers who choose $100 larger loans are 6.9 to 8.0 percentage points more likely to default than borrowers who choose smaller loans. Taken together, our results are consistent with the idea that information frictions lead to credit constraints in equilibrium.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Payday Lenders: Heroes or Villains?
By Adair Morse
-
Restricting Consumer Credit Access: Household Survey Evidence on Effects around the Oregon Rate Cap
-
Do Payday Loans Cause Bankruptcy?
By Paige Marta Skiba and Jeremy Tobacman
-
Payday Loans, Uncertainty and Discounting: Explaining Patterns of Borrowing, Repayment, and Default
By Paige Marta Skiba and Jeremy Tobacman
-
Information Disclosure, Cognitive Biases and Payday Borrowing
By Marianne Bertrand and Adair Morse
-
Information Disclosure, Cognitive Biases and Payday Borrowing
By Marianne Bertrand and Adair Morse
-
Payday Holiday: How Households Fare After Payday Credit Bans
-
What do High-Interest Borrowers do with Their Tax Rebate?
By Marianne Bertrand and Adair Morse