Subprime Consumer Credit Demand: Evidence from a Lender?sPricing Experiment

Sule Alan, Ruxandra Dumitrescu and Gyongyi Loranth

No 60, BCL working papers from Central Bank of Luxembourg

Abstract: We test the interest rate sensitivity of subprime credit card borrowers using a unique panel data set from a UK credit card company. What is novel about our contribution is that we were given details of a randomized interest rate experiment conducted by the lender between October 2006 and January 2007. We find that individuals who tend to utilize their credit limits fully do not reduce their demand for credit when subject to increases in interest rates as high as 3 percentage points. This finding is naturally interpreted as evidence of binding liquidity constraints. We also demonstrate the importance of truly exogenous variation in interest rates when estimating credit demand elasticities. We show that estimating a standard credit demand equation with nonexperimental variation leads to seriously biased estimates even when conditioning on a rich set of controls and individual fixed effects. In particular, this procedure results in a large and statistically significant 3-month elasticity of credit card debt with respect to interest rates even though the experimental estimate of the same elasticity is neither economically nor statistically different from zero.

Keywords: subprime credit; randomized trials; liquidity constraints (search for similar items in EconPapers)
JEL-codes: D11 D12 D14 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2011-02
New Economics Papers: this item is included in nep-ban, nep-exp and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.bcl.lu/fr/Recherche/publications/cahiers_etudes/60/BCLWP060.pdf (application/pdf)

Related works:
Journal Article: Subprime Consumer Credit Demand: Evidence from a Lender's Pricing Experiment (2013)
Working Paper: Subprime Consumer Credit Demand: Evidence from a Lender's Pricing Experiment (2012)
Working Paper: Subprime consumer credit demand: evidence from a lender's pricing experiment (2011)
Working Paper: Subprime Consumer Credit Demand: Evidence from a Lender's Pricing Experiment (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bcl:bclwop:bclwp060

Access Statistics for this paper

More papers in BCL working papers from Central Bank of Luxembourg Contact information at EDIRC.
Bibliographic data for series maintained by ().