Working Paper: NBER ID: w13067
Authors: William Adams; Liran Einav; Jonathan Levin
Abstract: 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.
Keywords: liquidity constraints; subprime lending; moral hazard; adverse selection
JEL Codes: D14; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| liquidity constraints (E41) | purchasing behavior (D12) |
| required down payment (R21) | purchasing behavior (D12) |
| car prices (P22) | purchasing behavior (D12) |
| loan size (G51) | default rates (E43) |
| high-risk borrowers (G21) | loan size (G51) |
| risk-based pricing (L11) | adverse selection (D82) |