Measuring the Welfare Cost of Asymmetric Information in Consumer Credit Markets

61 Pages Posted: 20 Sep 2021 Last revised: 7 Dec 2022

Date Written: September 2021

Abstract

Information asymmetries are known in theory to lead to inefficiently low credit provision, yet empirical estimates of the resulting welfare losses are scarce. This paper leverages a randomized experiment conducted by a large fintech lender to estimate welfare losses arising from asymmetric information in the market for online consumer credit. Building on methods from the insurance literature, we show how exogenous variation in interest rates can be used to estimate borrower demand and lender cost curves and recover implied welfare losses. While asymmetric information generates large equilibrium price distortions, we find only small overall welfare losses, particularly for high-credit-score borrowers.

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Suggested Citation

DeFusco, Anthony and Tang, Huan and Yannelis, Constantine, Measuring the Welfare Cost of Asymmetric Information in Consumer Credit Markets (September 2021). NBER Working Paper No. w29270, Available at SSRN: https://ssrn.com/abstract=3926951

Anthony DeFusco (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2211 Campus Drive
Evanston, IL 60208
United States

HOME PAGE: http://www.anthonydefusco.com

Huan Tang

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Constantine Yannelis

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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