Rise of the Machines: The Impact of Automated Underwriting

Mark Jansen, Hieu Nguyen and Amin Shams
Additional contact information
Hieu Nguyen: U of Utah
Amin Shams: Ohio State U

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: Using a randomized experiment in auto lending, we provide evidence of higher loan profitability with algorithmic machine underwriting relative to human underwriting. Machine-underwritten loans generate 10.2% higher loan-level profit than human-underwritten loans in a sample of 140,000 randomly assigned applications. The loans underwritten by machines not only have higher interest rates but also realize a 6.8% lower incidence of default. The performance gap is mainly driven by loans with higher complexity and where potential for agency conflicts is the highest. These results are consistent with algorithmic underwriting mitigating agency conflicts and humans' limited capacity for analyzing complex problems.

JEL-codes: D14 G21 O33 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-ban and nep-big
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Rise of the Machines: The Impact of Automated Underwriting (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2020-19

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