Does the Good Matter? Evidence on Moral Hazard and Adverse Selection from Consumer Credit Market

Alena Bičáková

No ECO2007/02, Economics Working Papers from European University Institute

Abstract: Default rates on instalment loans vary with type of the good purchased. Using an Italian dataset of instalment loans between 1995-1999, we first show that the variation persists even after controlling for contract and individual-specific characteristics, and for the potential selection bias due to credit rationing. We explore whether the residual variation in the default rates across the different types of goods is due to unobserved individual heterogeneity (selection effect) or due to the effect of the specific characteristics of the good (good effect). We claim that the two effects may be interpreted as adverse selection and moral hazard. We exploit the data on multiple contracts per individual to disentangle the two effects, and find that most of the variation is explained by the selection effect. Individuals who buy motorcycles on credit are more likely to default on any loan, while those buying kitchen appliances, furniture and computers are more likely to repay, compared to average. We conclude that there is asymmetric information in the consumer credit market, mostly in the form of adverse selection.

Keywords: consumer credit; default; adverse selection; moral hazard (search for similar items in EconPapers)
JEL-codes: D12 D14 D82 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-ban and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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