Papers
Search and Negotiation with Biased Beliefs in Consumer Credit Markets
(with Erik Berwart, Sean Higgins, and Santiago Truffa)
How do inaccurate priors about the distribution of interest rates affect search and outcomes in consumer credit markets? Consumer credit markets feature large amounts of within-borrower price dispersion in interest rates; if consumers are unaware of the extent of this price dispersion, they may shop less and take out loans at higher interest rates than they would otherwise. We conducted a randomized controlled trial with 112,063 loan seekers in Chile where we randomized whether we showed participants a price comparison tool that we built using administrative data from Chile's financial regulator. The tool shows loan seekers a conditional distribution of interest rates based on similar loans obtained recently by similar borrowers, using data on the universe of consumer loans merged with borrower characteristics. We also cross-randomized whether we asked participants their priors about the distribution of interest rates. We find that consumers thought interest rates were lower than they actually were, and the price comparison tool caused them to increase their expectations about the interest rate they would obtain by 56%. Consumers also underestimated price dispersion, and our price comparison tool caused them to increase their estimates of dispersion by 69%. The price comparison tool did not cause people to search or apply at more institutions, but it did cause them to receive 12% more offers, 11% lower interest rates, and to be 5% more likely to take out a loan. In contrast, merely asking participants their expectations about interest rates led them to search at 4% more institutions and obtain 9% lower interest rates.
NBER Summer Institute Presentation (20 min)
Removing the Fine Print: Standardized Products, Disclosure, and Consumer Outcomes
(with Gonzalo Iberti and Santiago Truffa)
Revise and Resubmit at Journal of Financial Economics
Prospective borrowers must study the fine print of loan contracts or risk surprises. To mitigate fine print, regulators have historically (a) improved disclosure or (b) standardized products. We use Chilean administrative data for a multi-stage natural experiment to separately identify the eects of disclosure and standardized products on borrower outcomes. We do this using Chile's unique dual-currency system, which generates exogenous variation around regulatory cutos. For financially sophisticated borrowers in our discontinuity sample disclosure reduces delinquencies by 13.7 percentage points or approximately 40%. We therefore use a difference-in-differences analysis to show that only standardized products benefit less sophisticated borrowers.
Works in Progress
Don’t Lend So Close to Me: Payday Lending Spillover Effects on Formal Credit (with Michael Boutros, Nuno Marques da Paixao, and Barry Scholnick)
Draft Available upon Request
We examine the impact of a hyper-local payday loan supply shock on debtor uses of formal credit, by matching debtor-level credit bureau data with location of individual payday lender entry and exit in a difference-in-differences setting. We find that payday lender entry into a neighborhood worsens the financial stress of borrowers who do not have the ability to borrow against housing, while only increasing credit card balances for those who do. However, we find that payday borrowing helps borrowers who are credit constrained, as their credit card balances under stress increase and credit scores drop significantly when a payday lender exits their neighbourhood. We also exploit exogenous variation in provincial regulation of payday lenders and find that 7 day cool-down periods between payday loans increase credit card stress, which persists for two years after payday lender entry. Regulations that restrict borrowers to one loan per lender increase their credit card balances under stress and damage their credit scores, though these effects are relatively short-lived. These results suggest that there are important heterogeneities in how payday borrowing interacts with formal credit products.
The Consumption and Borrowing Responses to Income Shocks and Debt Forgiveness (with Rajashri Chakrabarti, Kory Kroft, Slava Mikhed, Matt Notowidigdo, and Barry Scholnick)
The Debt Relief Project: Online and Low-Cost Access to Bankruptcy (with Stephanie Ben-Ishai, Zachary Irving, Jessica Montgomery, and Avantika Prabhakar)
Piloting Fall 2024
What are the Benefits of Consumption Smoothing Around Payday? (with Stephanie Ben-Ishai, Zachary Irving, Menaka Hampole, Jessica Montgomery, and Avantika Prabhakar)
Piloting Fall 2024
Resting Papers
Estimating The Information Component in Switching Costs: A Structural Approach
(with Gonzalo Iberti and Santiago Truffa)
We exploit a unique natural experiment to structurally estimate the information frictions associated with switching costs. Specically, we study a Chilean policy that simplied and standardized the presentation of loan characteristics in contracts and quotes. Using administrative data from the banking regulator, we exploit how this policy change affected the price-sensitivity in consumer decisions to identify the reduction in information frictions. We then incorporate this estimate into a dynamic structural model to explore the link between reduced informational frictions and welfare in long-term market equilibrium. We find that after the policy information frictions fell around 10 percent, which translated into an interest reduction of 180 basis points. We estimate a welfare improvement for consumers of 15 percent in the long run.