The Cost of Consumer Collateral: Evidence from Bunching
57 Pages Posted: 15 Mar 2022
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The Cost of Consumer Collateral: Evidence from Bunching
The Cost of Consumer Collateral: Evidence from Bunching
Date Written: January 1, 2022
Abstract
How do collateral requirements impact consumer borrowing behavior? Using administrative loan application and performance data from the U.S. Federal Disaster Loan Program, we exploit a loan amount threshold above which households must post their residence as collateral. One-third of all borrowers select the maximum uncollateralized loan amount, and our bunching estimates suggest that the median borrower is willing to give up 40% of their loan amount to avoid collateral. Exploiting time variation in the loan amount threshold, we find that collateral causally reduces default rates by 35%. Our results help to explain high perceived default costs in the mortgage market, and uniquely quantify the extent to which collateral reduces moral hazard in consumer credit markets.
Keywords: Collateral, Asymmetric Information, Moral Hazard, Collateral Aversion, Consumer Finance, Housing
JEL Classification: D14, D82, G23, G28
Suggested Citation: Suggested Citation