TY  - JOUR
AU  - Adams,William
AU  - Einav,Liran
AU  - Levin,Jonathan
TI  - Liquidity Constraints and Imperfect Information in Subprime Lending
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13067
PY  - 2007
Y2  - April 2007
UR  - http://www.nber.org/papers/w13067
L1  - http://www.nber.org/papers/w13067.pdf
N1  - Author contact info:
William Adams
Citigroup
E-Mail: william.adams@citigroup.com

Liran Einav
Stanford University
Department of Economics
579 Serra Mall
Stanford, CA  94305-6072
Tel: 650/723-3704
Fax: 650/725-5702
E-Mail: leinav@stanford.edu

Jonathan D. Levin
Stanford University
Department of Economics
579 Serra Mall
Stanford, CA  94305-6072
Tel: 650/723-5962
E-Mail: jdlevin@stanford.edu
AB  - We present new evidence on consumer liquidity constraints and the credit market conditions that might give rise to them. Our analysis is based on unique data from a large auto sales company that serves the subprime market. We first document the role of short-term liquidity in driving purchasing behavior, including sharp increases in demand during tax rebate season and a high sensitivity to minimum down payment requirements. We then explore the informational problems facing subprime lenders. We find that default rates rise significantly with loan size, providing a rationale for lenders to impose loan caps because of moral hazard. We also find that borrowers at the highest risk of default demand the largest loans, but the degree of adverse selection is mitigated substantially by effective risk-based pricing.
ER  -