Search and Negotiation with Biased Beliefs in Consumer Credit Markets

How do biased beliefs about the distribution of interest rates affect search, negotiation, and loan terms in consumer credit markets? Motivated by a model of sequential search and negotiation with potentially biased beliefs, we conducted a randomized controlled trial with 112,063 loan seekers in collaboration with Chile's financial regulator. We first elicited beliefs about the interest rate distribution, then showed treated participants a price comparison tool that we built using administrative data on the universe of consumer loans merged with borrower characteristics. The tool shows loan seekers a conditional distribution of interest rates based on similar loans obtained recently by similar borrowers. We find that most consumers thought interest rates were lower than they actually were and also underestimated price dispersion, and the price comparison tool caused them to update their beliefs. The price comparison tool did not cause people to search or apply at more institutions, but it did cause them to be 39% more likely to negotiate with their lender, to receive 13% more offers and 12% lower interest rates, and to be 5% more likely to take out a loan.