Working Paper: NBER ID: w29169
Authors: Constantine Yannelis; Anthony Lee Zhang
Abstract: Screening in consumer credit markets is often associated with large fixed costs. We present both theory and evidence that, when lenders use fixed-cost technologies to screen borrowers, increased competition may increase rather than decrease interest rates in subprime consumer credit markets. In more competitive markets, lenders have lower market shares, and thus lower incentives to invest in screening. Thus, when markets are competitive, all lenders face a riskier pool of borrowers, which can lead interest rates to be higher. We provide evidence for the model’s predictions in the auto loan market using administrative credit panel data.
Keywords: credit markets; competition; screening; interest rates; subprime lending
JEL Codes: D14; D4; G20; G21; G5; L62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased competition (L13) | Higher equilibrium interest rates (E43) |
| Lower market shares for lenders (G21) | Reduced incentives to screen borrowers effectively (G21) |
| Reduced incentives to screen borrowers effectively (G21) | Higher interest rates (E43) |
| Market concentration (L11) | Interest rates in low-risk segments (E43) |
| Market concentration (L11) | Interest rates in high-risk segments (G21) |
| Market concentration (L11) | Delinquency rates (G33) |
| Higher concentration (D30) | Lower loan quantities in high-risk markets (G21) |