We have benefited from the suggestions of the co-editor and three referees, and from the comments of many seminar participants. We acknowledge the support of the Stanford Institute for Economic Policy Research, the National Science Foundation (Einav and Levin), and the Alfred P. Sloan Foundation (Levin).
Contract Pricing in Consumer Credit Markets
Article first published online: 25 JUL 2012
© 2012 The Econometric Society
Volume 80, Issue 4, pages 1387–1432, July 2012
How to Cite
Einav, L., Jenkins, M. and Levin, J. (2012), Contract Pricing in Consumer Credit Markets. Econometrica, 80: 1387–1432. doi: 10.3982/ECTA7677
- Issue published online: 25 JUL 2012
- Article first published online: 25 JUL 2012
- Manuscript received January, 2008; final revision received August, 2011.
- Contract pricing;
- subprime lending;
- credit markets;
- asymmetric information
We analyze subprime consumer lending and the role played by down payment requirements in screening high-risk borrowers and limiting defaults. To do this, we develop an empirical model of the demand for financed purchases that incorporates both adverse selection and repayment incentives. We estimate the model using detailed transaction-level data on subprime auto loans. We show how different elements of loan contracts affect the quality of the borrower pool and subsequent loan performance. We also evaluate the returns to credit scoring that allows sellers to customize financing terms to individual applicants. Our approach shows how standard econometric tools for analyzing demand and supply under imperfect competition extend to settings in which firms care about the identity of their customers and their postpurchase behavior.