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Measuring the welfare cost of asymmetric information in consumer credit markets

DeFusco, Anthony A., Tang, Huan and Yannelis, Constantine (2022) Measuring the welfare cost of asymmetric information in consumer credit markets. Journal of Financial Economics, 146 (3). 821 - 840. ISSN 0304-405X

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[img] Text (Measuring the welfare cost of asymmetric information in consumer credit markets) - Accepted Version
Repository staff only until 17 September 2024.
Available under License Creative Commons Attribution Non-commercial No Derivatives.

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Identification Number: 10.1016/j.jfineco.2022.09.001

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.

Item Type: Article
Official URL: https://www.sciencedirect.com/journal/journal-of-f...
Additional Information: © 2022 Elsevier B.V.
Divisions: Finance
Subjects: H Social Sciences > HG Finance
JEL classification: D - Microeconomics > D1 - Household Behavior and Family Economics > D14 - Personal Finance
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
G - Financial Economics > G1 - General Financial Markets > G10 - General
G - Financial Economics > G2 - Financial Institutions and Services > G23 - Pension Funds; Other Private Financial Institutions
Date Deposited: 28 Sep 2022 16:36
Last Modified: 05 Oct 2022 23:22
URI: http://eprints.lse.ac.uk/id/eprint/116693

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