Heterogeneous Sensitivities to Interest Rate Changes: Evidence from Consumer Loans
69 Pages Posted: 16 Aug 2017 Last revised: 7 Apr 2019
Date Written: February 2019
I analyze the credit contract decisions made by borrowers and whether borrower choices can be used for screening. In the setting, the interest rate jumps at specific loan amount thresholds, which create incentives for bunching below the cutoffs. I find substantial heterogeneity in sensitivities to interest rate jumps. Evidence supports borrower sophistication as the main explanation for this heterogeneity. Furthermore, borrowers who fail to bunch below the thresholds are 18% more likely to default and 24% less likely to receive funding from institutional lenders. Findings suggest that borrowers’ suboptimal credit decisions can be used to reduce information asymmetries.
Keywords: credit markets, overpayment, sophistication, screening, fintech, peer-to-peer lending, consumer finance
JEL Classification: D14, D82, G23
Suggested Citation: Suggested Citation