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Research Details

Measuring the Welfare Effects of Adverse Selection in Consumer Credit Markets

Abstract

Adverse selection is known in theory to lead to inefficiently low credit provision, yet empirical estimates of the resulting welfare losses are scarce. This paper leverages a randomized experiment conducted by a large fintech lender to estimate welfare losses arising from selection in the market for online consumer credit. Building on methods from the insurance literature, we show how exogenous variation in interest rates can be used to estimate borrower demand and lender cost curves and recover implied welfare losses. While adverse selection leads to large equilibrium price distortions, we find only small overall welfare losses, particularly for high-credit-score borrowers.

Type

Working Paper

Author(s)

Anthony DeFusco, Huan Tang, Constantine Yanellis

Date Published

2020

Citations

DeFusco, Anthony, Huan Tang, and Constantine Yanellis. 2020. Measuring the Welfare Effects of Adverse Selection in Consumer Credit Markets.

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