Real Effects of Search Frictions in Consumer Credit Markets

74 Pages Posted: 19 Oct 2017 Last revised: 25 Oct 2017

Bronson Argyle

Brigham Young University - Department of Finance

Taylor Nadauld

Brigham Young University

Christopher Palmer

MIT Sloan; National Bureau of Economic Research (NBER)

Date Written: October 18, 2017

Abstract

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

Suggested Citation

Argyle, Bronson and Nadauld, Taylor and Palmer, Christopher, Real Effects of Search Frictions in Consumer Credit Markets (October 18, 2017). MIT Sloan Research Paper No. 5242-17. Available at SSRN: https://ssrn.com/abstract=3044889 or http://dx.doi.org/10.2139/ssrn.3044889

Bronson Argyle

Brigham Young University - Department of Finance ( email )

United States

Taylor Nadauld

Brigham Young University ( email )

Provo, UT 84602
United States

Christopher Palmer (Contact Author)

MIT Sloan ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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