The Extension of Credit with Nonexclusive Contracts and Sequential Banking Externalities

Giacomo De Giorgi, Andres Drenik and Enrique Seira

American Economic Journal: Economic Policy, 2023, vol. 15, issue 1, 233-71

Abstract: Nonexclusive sequential borrowing can increase default and impose externalities on prior lenders. We document that sequential banking is pervasive with substantial effects. Using credit card applications from a large bank and data on the applicants' entire loan portfolios, we find that an additional credit line causes a 5.9 percentage point decline in default for high-score borrowers on previous loans. However, for low-score borrowers, it causes a 19 percentage point increase. The former use the new credit to smooth payments on preexisting loans, while the latter increase their total debt. These results have implications for "no-universal-default" regulation and financial inclusion.

JEL-codes: D62 D82 G21 G51 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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DOI: 10.1257/pol.20200220

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