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Research Details
Measuring the Welfare Cost of Asymmetric Information in Consumer Credit Markets, Journal of Financial Economics
Abstract
Information asymmetries are 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 asymmetric information 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 asymmetric information generates large equilibrium price distortions, we find only small overall welfare losses, particularly for high-credit-score borrowers.
Type
Article
Author(s)
Anthony DeFusco, Huan Tang, Constantine Yanellis
Date Published
2022
Citations
DeFusco, Anthony, Huan Tang, and Constantine Yanellis. 2022. Measuring the Welfare Cost of Asymmetric Information in Consumer Credit Markets. Journal of Financial Economics. 146(3): 821-840.
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