Consumer Welfare and Product Creation: The Credit Supply Channel

70 Pages Posted: 8 Mar 2020

See all articles by Poorya Kabir

Poorya Kabir

Columbia University - Columbia Business School, Finance

Date Written: November 15, 2019

Abstract

I show that firms that face a reduction in credit supply reduce product creation, by using variation from US banks' exposure to the mortgage market to instrument for credit supply. The magnitude is substantial: firms facing a one-standard-deviation decrease in credit supply offered 10% fewer products. Furthermore, I show that the reduction in product offerings derives from the limited creation of new products rather than the destruction of existing ones. Motivated by these findings, I develop a model to investigate the equilibrium responses of consumers and firms. I estimate that the reduction in credit supply is responsible for a 1% drop in consumer welfare because of reduced product creation. Two types of equilibrium response are responsible for welfare loss that is smaller than a "naive" interpretation of the reduced form estimates: first, in equilibrium, consumers substitute products with other available products in the same category; and second, in equilibrium, firms' new products have lower "appeal" (quality or taste) relative to existing products.

Keywords: Product Creation, Credit Supply, Consumer Welfare, Product Innovation

JEL Classification: G01, G3, D12, D6

Suggested Citation

Kabir, Poorya, Consumer Welfare and Product Creation: The Credit Supply Channel (November 15, 2019). Available at SSRN: https://ssrn.com/abstract=3536665 or http://dx.doi.org/10.2139/ssrn.3536665

Poorya Kabir (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

NY
United States

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