Measuring the Welfare Effects of Adverse Selection in Consumer Credit Markets

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Abstract/Contents

Abstract: Adverse selection is 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 selection 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 adverse selection leads to large equilibrium price distortions, we find only small overall welfare losses, particularly for high-credit-score borrowers.

Type of resource	text
Date created	August 24, 2021

DOI	https://doi.org/10.25740/by014mn4793
Location	https://purl.stanford.edu/by014mn4793

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License: This work is licensed under a Creative Commons Attribution 4.0 International license (CC BY).

Preferred citation: DeFusco, A., Tang, H., and Yannelis, C. (2022). Measuring the Welfare Effects of Adverse Selection in Consumer Credit Markets. Stanford Digital Repository. Available at https://purl.stanford.edu/by014mn4793

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