Measuring the Welfare Cost of Asymmetric Information in Consumer Credit Markets
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.
This version: July 3, 2022. We thank Isha Agarwal, Scott Baker, Effi Benmelech, Greg Buchak, Doug Diamond, Jason Donaldson, Liran Einav, Arpit Gupta, Zhiguo He, José Ignacio Cuesta, Sasha Indarte, Dirk Jenter, Gregor Matvos, Filippo Mezzanotti, Holger Mueller, Daniel Paravisini, Raghu Rajan, Amir Sufi, SusanWoodward, Kairong Xiao, Anthony Zhang, Yiwei Zhang and numerous other colleagues for helpful conversations, comments, and suggestions. We are grateful for comments from seminar and conference participants at the Boulder Summer Conference on Consumer Financial Decision Making, University of Chicago (Booth), Columbia Business School, Copenhagen Business School, Harvard University (HBS), the Hong Kong University of Science and Technology Business School, IDC Herzliya Arison School of Business, the London School of Economics, the Midwest Finance Association, the Moscow Higher School of Economics, the NBER Corporate Finance Spring Meeting, Norges Bank, Northwestern University (Kellogg), the Philadelphia Federal Reserve Bank, the RCFS Winter Conference, the Red Rock Finance Conference, Stanford Business School, the Stanford Institute for Theoretical Economics (SITE) Financial Regulation session, University of Michigan (Ross), University of Pennsylvania (Wharton), and Washington University in St. Louis. Yannelis gratefully acknowledges financial support from the Booth School of Business at the University of Chicago. The experiment we study in this paper has been registered with the AEA RCT Registry (RCT ID: AEARCTR-0008183), available at https://www.socialscienceregistry.org/trials/8183. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Anthony A. DeFusco & Huan Tang & Constantine Yannelis, 2022. "Measuring the welfare cost of asymmetric information in consumer credit markets," Journal of Financial Economics, vol 146(3), pages 821-840.