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BH-2: Consumer Credit
Politicizing Consumer Credit
1University of Toronto; 2Federal Reserve Bank of Cleveland; 3London Business School
Using proprietary data on individual Americans' credit histories, we find that disadvantaged borrowers lose access to credit when their home-state U.S. Senator ascends to chair a powerful Senate committee. Borrowers in a new Senate committee chair's home state are 4.5% less likely to obtain credit relative to borrowers in unaffected states, despite no observed differences in credit demand. This contraction in credit supply is concentrated among historically credit-constrained borrower groups (poor borrowers, non-white borrowers, and borrowers with low credit scores), and is stronger in areas with fewer politically-active consumers and more politically-connected lenders. Our evidence is most consistent with a "political protection" hypothesis in which the ascension of a home-state Senator reduces pressure on banks to apply lower screening standards to disadvantaged borrowers. Our results highlight the distinction between political power and legislative outcomes and provide a counterpoint to recent findings that government intervention improves consumers' access to credit.
Costly Mistakes in Credit Markets: Evidence from Consumer Credit
University of Texas at Austin
This paper studies how borrowers respond to interest rates. To this end, I exploit a new source of quasi-experimental variation in interest rates along with econometric bunching methods to study the behavioral responses to a notched interest rate schedule. In the setting, the loan interest rate schedule features discrete jumps at specific loan amount thresholds, which create strong incentives for bunching below those thresholds. Contrary to what the standard model predicts, the findings show that not all borrowers minimize their financing costs, and there is substantial heterogeneity in response by borrowers. The demand for loans decreases more for borrowers with the highest creditworthiness when the interest rate increases, while the elasticity is close to zero for borrowers with the lowest creditworthiness. I explore reasons for the lack of bunching, and I find that sophistication accounts for most of the heterogeneity, while liquidity constraints, adjustment costs, and saliency seem to play only marginal roles. Finally, I find that the decision of whether to bunch can help screen borrowers, since those who bunch below the thresholds are less likely to default on their loans.
Economic Scarcity and Consumers' Credit Choice
1Swedish House of Finance; 2Stockholm School of Economics; 3Sveriges Riksbank
This paper documents that increased scarcity right before a payday causally impacts credit choices. Exploiting a transfer system that randomly assigns the number of days between paydays to Swedish social welfare recipients, we find that low educated borrowers behave as if they are more present-biased when making credit choices during days when their budget constraints are exogenously tighter. As a result their default risk and debt servicing cost increase significantly. Access to mainstream credit or liquidity buffers cannot explain our results. Our findings highlight that increased levels of economic scarcity risk to reinforce the conditions of poverty.
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Conference: EFA 2017
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