The Cost of Consumer Collateral: Evidence from Bunching

57 Pages Posted: 15 Mar 2022

See all articles by Benjamin Collier

Benjamin Collier

Temple University - Risk Management & Insurance & Actuarial Science

Cameron Ellis

University of Iowa - Department of Finance

Benjamin J. Keys

The Wharton School - University of Pennsylvania, Real Estate Department

Multiple version iconThere are 2 versions of this paper

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

Collier, Benjamin and Ellis, Cameron and Keys, Benjamin J., The Cost of Consumer Collateral: Evidence from Bunching (January 1, 2022). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , Available at SSRN: https://ssrn.com/abstract=4048069 or http://dx.doi.org/10.2139/ssrn.4048069

Benjamin Collier

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1301 Cecil B. Moore Ave.
Philadelphia, PA 19122
United States

Cameron Ellis

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States

Benjamin J. Keys (Contact Author)

The Wharton School - University of Pennsylvania, Real Estate Department ( email )

Philadelphia, PA 19104-6330
United States

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