Asymmetric Information and the Automobile Loan Market

Posted: 8 Jul 2005

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Brent W. Ambrose

Pennsylvania State University

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC)

Abstract

Information revelation can occur in a variety of ways. For example, in the home mortgage market, borrowers reveal their expected house tenure through their choice of mortgage contracts. As a result, lenders offer a menu of mortgage interest rate and point combinations in an effort to learn private information about borrowers' potential mobility. This paper uses a unique dataset of individual automobile loan performance to assess whether borrower consumption choice reveals information about future loan performance. Results indicate that the automotive make and model a consumer selects provides information about the loan's performance - that is, we observe differential loan performance after we control for borrower characteristics. The results from this study suggest that lenders, instead of charging a house-rate for all auto loans, could profitably pursue risk-based pricing based on the type of car the borrower purchases.

Keywords: Consumer debt, consumption decisions, prepayment, default

JEL Classification: G2, C41, D14, D82

Suggested Citation

Agarwal, Sumit and Ambrose, Brent W. and Chomsisengphet, Souphala, Asymmetric Information and the Automobile Loan Market. Available at SSRN: https://ssrn.com/abstract=754828

Sumit Agarwal (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

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

Brent W. Ambrose

Pennsylvania State University ( email )

University Park, PA 16802-3306
United States
814-867-0066 (Phone)
814-865-6284 (Fax)

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street, SW
Washington, DC 20219
United States
202-649-5533 (Phone)

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