Auto Dealer Loan Intermediation: Consumer Behavior and Competitive Effects

66 Pages Posted: 28 Sep 2020

See all articles by David Low

David Low

Consumer Financial Protection Bureau

Jonathan Lanning

Consumer Financial Protection Bureau

Tobias Salz

MIT

Andreas Grunewald

University of Bonn - Economic Science Area

Multiple version iconThere are 2 versions of this paper

Date Written: April 2, 2020

Abstract

This paper studies the intermediation of auto loans through auto dealers using new and comprehensive data. Lenders give auto dealers discretion to price loans. The first part of our project leverages details of the contracts between lenders and dealers to demonstrate that many consumers are substantially less responsive to finance charges than to vehicle charges. This wedge in responsiveness is particularly pronounced for consumers with low income as well as consumers living in areas with low education levels. Dealers take this consumer-specific wedge into account when jointly pricing the car and the loan, leading to a form of price discrimination. We then estimate an equilibrium model that allows us to explore the implications of this wedge in an oligopolistic market. Counterfactual exercises demonstrate that the wedge in responsiveness has a substantial impact on dealer pricing behavior, consumer surplus, and the distribution of prices across areas with low and high income. Finally, we explore what happens if dealers have no discretion to price loans. Because of an effect reminiscent of double marginalization, we find that total prices would increase and consumer surplus would fall.

Suggested Citation

Low, David and Lanning, Jonathan and Salz, Tobias and Grunewald, Andreas, Auto Dealer Loan Intermediation: Consumer Behavior and Competitive Effects (April 2, 2020). Consumer Financial Protection Bureau Office of Research Working Paper No. 2020-02, Available at SSRN: https://ssrn.com/abstract=3568571 or http://dx.doi.org/10.2139/ssrn.3568571

David Low (Contact Author)

Consumer Financial Protection Bureau ( email )

United States

Jonathan Lanning

Consumer Financial Protection Bureau ( email )

United States

Tobias Salz

MIT ( email )

50 Memorial Dr
Cambridge, MA 02142
United States

HOME PAGE: http://https://economics.mit.edu/faculty/tsalz

Andreas Grunewald

University of Bonn - Economic Science Area ( email )

Adenauerallee 24-42
D-53113 Bonn
Germany

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