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Rationality in the Consumer Credit Market: Choosing between Alternative and Mainstream Credit

Posted: 3 Jan 2012 Last revised: 26 Jul 2017

Sumit Agarwal

Georgetown University - Department of Finance

Marieke Bos

Swedish House of Finance - Stockholm School of Economics

Date Written: June 1, 2014

Abstract

In this paper we study whether consumers optimally choose between formal and informal credit, using a unique panel dataset with all registered information available on consumers’ behavior within the Swedish alternative and mainstream credit markets. Specifically, we analyze to what extent credit applications and existing credit lines at any mainstream financial institution influence the decision to take pawn credit. We find the likelihood of applying for pawn credit, on average, increases by 8.8 percent for those whose loan application was rejected by the regular bank. However, we also find that the lion’s share of pawn credit borrowers do not apply for mainstream (cheaper) credit before taking a pawn loan. The decision not to apply, however, turns out to be rational -- we find that 93 percent of their loan applications would have been rejected had they applied for credit at a mainstream financial institution. Finally, we find evidence suggesting that immigrant pawn credit borrowers, are at least, equally well-informed about their chances to obtain mainstream regular credit as their Swedish born counterparts.

Keywords: Consumer credit, Lending policy, Pawn lending, Consumer rationality

JEL Classification: C34, C35, D63, D81, G21

Suggested Citation

Agarwal, Sumit and Bos, Marieke, Rationality in the Consumer Credit Market: Choosing between Alternative and Mainstream Credit (June 1, 2014). Available at SSRN: https://ssrn.com/abstract=1978574 or http://dx.doi.org/10.2139/ssrn.1978574

Sumit Agarwal (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-8207 (Phone)

HOME PAGE: http://www.ushakrisna.com

Marieke Bos

Swedish House of Finance - Stockholm School of Economics ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

HOME PAGE: http://www.mariekebos.org

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