Liquidity Constraints and Imperfect Information in Subprime Lending

William Adams, Liran Einav and Jonathan Levin

American Economic Review, 2009, vol. 99, issue 1, 49-84

Abstract: We present new evidence on consumer liquidity constraints and the credit market conditions that might give rise to them. We analyze unique data from a large auto sales company serving the subprime market. Short-term liquidity appears to be a key driver of consumer behavior. Demand increases sharply during tax rebate season and purchases are highly sensitive to down-payment requirements. Lenders also face substantial informational problems. Default rates rise significantly with loan size, providing a rationale for loan caps, and higher-risk borrowers demand larger loans. This adverse selection is mitigated, however, by risk-based pricing. (JEL D14, D82, D83, G21)

JEL-codes: D14 D82 D83 G21 (search for similar items in EconPapers)
Date: 2009
Note: DOI: 10.1257/aer.99.1.49
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Citations: View citations in EconPapers (160)

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Working Paper: Liquidity Constraints and Imperfect Information in Subprime Lending (2007)
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