Econometrica: Jul 2012, Volume 80, Issue 4

Contract Pricing in Consumer Credit Markets

https://doi.org/10.3982/ECTA7677
p. 1387-1432

Liran Einav, Mark Jenkins, Jonathan Levin

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.

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Supplement to "Contract Pricing in Consumer Credit Markets'

This zip file contains the replication files for the manuscript.

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Supplement to "Contract Pricing in Consumer Credit Markets"

This appendix provides a more detailed analysis of a parameterized version of the consumer model presented in Section 4.1.  It also illustrates some of the theoretical properties of the model and shows that the model can incorporate features observed in the data. Third, it shows the calibrated parameters of the model to match several key moments in data and further explores the features of the model.  Finally, it reports how well this model can be approximated by the linearized version in Section 4.3 of the paper.

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Supplement to "Contract Pricing in Consumer Credit Markets"

This appendix describes the details associated with the estimation of the model described Sections 4 and 5 of the paper. 

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