Testing for adverse selection and moral hazard in consumer loan markets
This paper explores the significance of unobservable default risk in mortgage and automobile loan markets. I develop and estimate a two-period model that allows for heterogeneous forms of simultaneous adverse selection and moral hazard. Controlling for income levels, loan size and risk aversion, I find robust evidence of adverse selection, with borrowers self-selecting into contracts with varying interest rates and collateral requirements. For example, ex-post higher-risk borrowers pledge less collateral and pay higher interest rates. Moreover, there is strongly suggestive evidence of moral ...
Household borrowing after personal bankruptcy
A large literature has examined factors leading to filing for personal bankruptcy, but little is known about household borrowing after bankruptcy. Using data from the Survey of Consumer Finances, we find that relative to comparable nonfilers, bankruptcy filers generally have more limited access to unsecured credit but borrow more secured debt post bankruptcy, and they pay higher interest rates on all types of debt. We also find that credit access and borrowing costs improve as more time passed since filing. However, filers experience renewed debt payment difficulties and accumulate less ...
Risk-based pricing of interest rates in household loan markets
Focusing on observable default risk's role in loan terms and the subsequent consequences for household behavior, this paper shows that lenders increasingly used risk-based pricing of interest rates in consumer loan markets during the mid-1990s. It tests three resulting predictions. First, the premium paid per unit of risk should have increased over this period. Second, debt levels should react accordingly. Third, fewer high-risk households should be denied credit, further contributing to the interest rate spread between the highest- and lowest-risk borrowers. For those obtaining loans, the ...
A re-examination of the role of relationships in the loan-granting process
We reexamine the role of relationships in the loan granting process overall. A practical implication emerging from the classical studies on the role of relationships in credit rationing is that good relationships between a borrower and his lender should, in fact, work to lower the interest rate charged to the borrower. We test this implication in our paper using a robust sample selection methodology that explicitly accounts for the entire fabric of the loan granting process, including a borrower?s decision to apply to the bank for a loan (or not), whether a bank approves the application for a ...
Making regulation work for consumers and banks
Consumer lending at community banks
Scale economies at payday loan stores
Evidence of bank information monopolies across the business cycle
Information asymmetries and the effects of banking mergers of firm-bank relationships
This study examines the effects of mergers between commercial banks and investment banks on firm-bank relationships and the pricing of loan contracts, focusing on the role of information asymmetries. I find that, prior to a public securities issuance, junk rated firms are more likely to switch lenders to a merged commercial-investment bank when their existing lenders are pure commercial banks. Borrowers that issue public securities and are in local lending relationships are less likely to switch lenders after their bank merges with an investment bank. Also, when issuing public debt, ...