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Consumer Finance: Demand, Public Policy, and Market Equilibrium

Paper Session

Sunday, Jan. 6, 2019 10:15 AM - 12:15 PM

Atlanta Marriott Marquis, L506
Hosted By: Econometric Society
  • Chair: Neale Mahoney, University of Chicago

Loan Guarantees and Credit Supply

Natalie Bachas
,
Princeton University
Jeffrey Perry
,
U.S. Congressional Budget Office
Constantine Yannelis
,
New York University

Abstract

The efficiency of federal lending guarantees depends on whether guarantees impact lending
supply, or simply act as a subsidy to lenders. We estimate the elasticity of lending supply
to loan guarantees by exploiting notches in guarantees for loans backed by the Small Business
Administration. We find significant bunching on the side of the size threshold that carries
a higher loan guarantee, and estimate an elasticity of approximately 5. We find that the excess
mass is greater in years when guarantees are higher, and nonexistent in years when the
guarantee notch is eliminated.

Private Information and Price Regulation in the US Credit Card Market

Scott Nelson
,
Princeton University / Chicago Booth

Abstract

The 2009 CARD Act limited credit card lenders' ability to raise borrowers' interest rates on the basis of new information. This paper estimates the efficiency and distributional effects of these restrictions in equilibrium. Both risk- and demand-relevant information had previously been priced through such rate increases; after the Act, pricing became less responsive to risk while markups on price-inelastic borrowers fell. Price dispersion fell immediately after the Act by about one third, consumers responded to relative price changes with riskier (safer) consumers borrowing more (less), and lenders' excess returns on some categories of accounts were reduced, sometimes to zero. A structural model reveals how the interaction of information asymmetries and lenders' market power determined market outcomes under the new restrictions. Reduced private-information rents for lenders allowed transacted prices to fall even as risk became more difficult to price. At the same time, partial market unraveling pushed some of the safest borrowers out of the market. Reflecting the importance of pre-CARD-Act markups, consumers at all credit scores captured roughly twice as much surplus as a result of the Act's repricing restrictions, while total surplus inclusive of firm profits rose among prime consumers. Model estimation recovers primitives of the US credit card market, including a non-parametrically estimated distribution of borrower private-information types, heterogeneous price sensitivities across borrower risk, and the importance of consumer switching costs across accounts.

Teaser Rate Loans and Consumer Welfare

Sumit Agarwal
,
Georgetown University
Souphala Chomsisengphet
,
U.S. Office of the Comptroller of the Currency
Neale Mahoney
,
University of Chicago
Johannes Stroebel
,
New York University

Abstract

We study the impact of teaser rate credit cards contracts, which have a zero introductory
interest rate and a positive go-to rate that takes effect after a predetermined number of
months. We specify a dynamic model of borrowing that captures consumers’ sensitivity to
contemporaneous interest rates and the potential that consumers may not fully internalize
higher interest rates in the future. We estimate the parameters of the model using
administrative data on millions of credit card contracts and regression discontinuities in the
relationship between the go-to interest rate and a consumers’ credit scores. We use the model
to quantify the extent to which consumers borrow in a dynamically optimal manner and to
estimate the welfare effects of regulations that would prohibit teaser rate contracts.

The Equilibrium Effects of Asymmetric Information: Evidence from Consumer Credit Markets

Andres Liberman
,
New York University
Christopher Neilson
,
Princeton University
Luis Opazo
,
Central Bank of Chile
Seth Zimmerman
,
University of Chicago

Abstract

This paper exploits a large-scale natural experiment to study the equilibrium effects of information
restrictions in credit markets. In 2012, Chilean credit bureaus were forced to stop reporting defaults
for 2.8 million individuals (21% of adult population). We show that the theoretical effects of information
deletion on aggregate borrowing and total surplus are ambiguous and depend on the pre-deletion
demand and cost curves for defaulters and non-defaulters. Using panel data on the universe of bank
borrowers in Chile combined with the deleted registry information, we implement machine learning
techniques to measure changes in lenders’ cost predictions following deletion. Deletion reduces (raises)
predicted costs the most for poorer defaulters (non-defaulters) with limited borrowing histories. Using a
difference-in-differences design, we find that individuals exposed to increases in predicted costs reduce
borrowing by 6.4%, while those exposed to decreases raise borrowing by 11.8% following the deletion,
for a 3.5% aggregate drop in borrowing. Using the difference-in-difference estimates as inputs into the
theoretical framework, we find that deletion reduced aggregate welfare.
JEL Classifications
  • D1 - Household Behavior and Family Economics
  • G2 - Financial Institutions and Services