Real Effects of Search Frictions in Consumer Credit Markets

85 Pages Posted: 13 Jan 2020

See all articles by Bronson Argyle

Bronson Argyle

Brigham Young University - Department of Finance

Taylor Nadauld

Brigham Young University

Christopher Palmer

MIT Sloan; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2020


We establish two underappreciated facts about costly search. First, unless demand is perfectly inelastic, search frictions can result in significant deadweight loss by decreasing consumption. Second, whenever cross-price elasticities are non-zero, costly search in one market also affects quantities in other markets. As predicted by our model of search for credit under elastic demand, we show that search frictions in credit markets contribute to price dispersion, affect loan sizes, and decrease final-goods consumption. Using microdata from millions of auto-loan applications and originations not intermediated by car dealers, we isolate plausibly exogenous variation in interest rates due to institution-specific pricing rules that price risk with step functions. These within-lender discontinuities lead to substantial variation in the benefits of search across lenders and distort extensive- and intensive-margin loan and car choices differentially in high- versus low-search-cost areas. Our results demonstrate real effects of the costliness of shopping for credit and the continued importance of local bank branches for borrower outcomes even in the mobile-banking era. More broadly, we conclude that costly search affects consumption in both primary and complementary markets.

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Suggested Citation

Argyle, Bronson and Nadauld, Taylor and Palmer, Christopher, Real Effects of Search Frictions in Consumer Credit Markets (January 2020). NBER Working Paper No. w26645, Available at SSRN:

Bronson Argyle (Contact Author)

Brigham Young University - Department of Finance ( email )

United States

Taylor Nadauld

Brigham Young University ( email )

Christopher Palmer

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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