Real Effects of Search Frictions in Consumer Credit Markets
74 Pages Posted: 19 Oct 2017 Last revised: 25 Oct 2017
Date Written: October 18, 2017
We estimate how search frictions in credit markets distort consumption, contribute to substantial price dispersion, and modulate the pass-through of interest-rate shocks. Using rich microdata from millions of auto-loan applications and originations by hundreds of financial providers, we isolate plausibly exogenous variation in interest rates due to institution-specific step-function pricing rules. These discontinuities lead to substantial variation in the benefits of search, affect physical search behavior, and distort extensive- and intensive-margin loan and car choices through quasi-random interest-rate markups. We further show that these discontinuities are more consequential in areas we measure as having high search costs. Overall, our results provide evidence of the real effects of the costliness of shopping for credit, the continued importance of local bank branches, and how search frictions inhibit the transmission of monetary policy to durable goods purchases. More broadly, we conclude that the welfare consequences of costly search include inefficient consumption in both primary and related markets.
Keywords: credit markets, search, auto loans, durables, regression discontinuity
JEL Classification: D12, D83, E43, G21, L11
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