Working Paper: CEPR ID: DP9210
Authors: Sule Alan; Gyngyi Lrnth
Abstract: Using a unique panel data set from a UK credit card company, we analyze the interest rate sensitivity of subprime credit card borrowers. In addition to all individual transactions and loan terms, we also have access to details of a randomized interest rate experiment conducted by the lender on the existing (inframarginal) loans. Access to such information by academic researchers is rare. The data and the experimental design provide us with a clean identification of heterogenous interest rate sensitivities across borrower types within the subprime population. We find that subprime credit card borrowers generally do not reduce their demand for credit when subject to increases in interest rates. However, we estimate a number of interesting responses that suggest that subprime borrowers are not a homogenous group. The paper also contributes to the literature by demonstrating the importance of isolating exogenous variation in interest rates. We show that estimating a standard credit demand equation with the non-experimental variation in the data leads to severely biased estimates. This is true even when conditioning on a rich set of controls and individual fixed effects.
Keywords: subprime credit; randomized trials; liquidity constraints
JEL Codes: D11; D12; D14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| non-experimental analysis (C90) | misleading results regarding credit demand (E51) |
| interest rate changes (E43) | credit demand among subprime borrowers (G21) |
| interest rate increases (E43) | demand for credit from subprime borrowers (G21) |
| interest rate increases (E43) | cash advances from high-risk, high-utilization borrowers (G51) |