Working Paper: NBER ID: w28136
Authors: Andreas Grunewald; Jonathan A. Lanning; David C. Low; Tobias Salz
Abstract: This paper studies the intermediation of auto loans through auto dealers using new and comprehensive administrative data. The arrangements between auto dealers and lenders incentivize dealers to increase loan prices. We leverage details of the corresponding contracts to demonstrate that many consumers are less responsive to finance charges than to vehicle charges. Taking this behavior into account, we estimate an equilibrium model of dealer price setting and lender competition. We explore counterfactuals where dealers have no discretion to price loans and final rates are set by lenders instead. We find large gains in consumer surplus from such a policy.
Keywords: Auto loans; Consumer behavior; Dealer intermediation; Market competition
JEL Codes: G41; G51; L0; L13; L5; L62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| consumer sensitivity to vehicle prices (R48) | dealer markup on loans (G21) |
| dealer markup on loans (G21) | dealer profits (L81) |
| lower sensitivity to loan charges (G21) | higher dealer markups (L81) |
| consumer misperception of finance charges (G50) | decision-making process (D70) |
| eliminating dealer discretion over loan pricing (G18) | increase in consumer surplus (D11) |
| dealer discretion (R48) | market competitiveness (L11) |
| dealer discretion (R48) | consumer outcomes (G52) |