American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
The Extension of Credit with Nonexclusive Contracts and Sequential Banking Externalities
American Economic Journal: Economic Policy
vol. 15,
no. 1, February 2023
(pp. 233–71)
Abstract
Nonexclusive sequential borrowing can increase default and impose externalities on prior lenders. We document that sequential banking is pervasive with substantial effects. Using credit card applications from a large bank and data on the applicants' entire loan portfolios, we find that an additional credit line causes a 5.9 percentage point decline in default for high-score borrowers on previous loans. However, for low-score borrowers, it causes a 19 percentage point increase. The former use the new credit to smooth payments on preexisting loans, while the latter increase their total debt. These results have implications for "no-universal-default" regulation and financial inclusion.Citation
De Giorgi, Giacomo, Andres Drenik, and Enrique Seira. 2023. "The Extension of Credit with Nonexclusive Contracts and Sequential Banking Externalities." American Economic Journal: Economic Policy 15 (1): 233–71. DOI: 10.1257/pol.20200220Additional Materials
JEL Classification
- D62 Externalities
- D82 Asymmetric and Private Information; Mechanism Design
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth