Working Paper: NBER ID: w29270
Authors: Anthony A. Defusco; Huan Tang; Constantine Yannelis
Abstract: 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.
Keywords: Asymmetric Information; Consumer Credit; Welfare Losses; Fintech; Randomized Experiment
JEL Codes: D14; D82; G10; G23; G5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| asymmetric information (D82) | inefficiently high equilibrium pricing (D41) |
| interest rates (E43) | borrower demand (E41) |
| interest rates (E43) | chargeoffs (G33) |
| asymmetric information (D82) | welfare losses (D69) |
| borrower demand (E41) | welfare losses (D69) |
| interest rates (E43) | competitive equilibrium interest rate (E43) |
| socially efficient rate (D61) | welfare losses (D69) |