Competition and selection in credit markets

Constantine Yannelis and Anthony Lee Zhang

Journal of Financial Economics, 2023, vol. 150, issue 2

Abstract: Screening in consumer credit markets is often associated with large fixed costs. We present both theory and evidence that, when lenders use fixed-cost technologies to screen borrowers, increased competition may increase rather than decrease interest rates in subprime consumer credit markets. In more competitive markets, lenders have lower market shares, and thus lower incentives to invest in screening. Thus, when markets are competitive, all lenders face a riskier pool of borrowers, which can lead interest rates to be higher. We provide evidence for the model’s predictions in the auto loan market using administrative credit panel data.

Keywords: Imperfect Competition; Screening; Credit Markets (search for similar items in EconPapers)
JEL-codes: G2 G3 G5 L1 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Working Paper: Competition and Selection in Credit Markets (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:150:y:2023:i:2:s0304405x23001423

DOI: 10.1016/j.jfineco.2023.103710

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