Dealer Pricing of Consumer Credit

Giuseppe Bertola, Stefan Hochguertel () and Winfried Koeniger

No 440, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Interest rates on consumer lending are lower when funds are tied to purchase of a durable good than when they are made available on an unconditional basis. Further, dealers often choose to bear the financial cost of their customers’ credit purchases. This paper interprets this phenomenon in terms of monopolistic price discrimination. We characterize consumers’ intertemporal consumption decisions when their borrowing and lending rates are different not only from each other, but also from the internal rate of return of financing terms for a specific durable good purchase. A stylized model offers a closed-form characterization of purchase decisions as a function of the amount and timing of consumers’ resources, of the spread between the borrowing and lending rates, and of the pricing of cash and credit purchases. We then study theoretical and empirical relationships between the structure of financial markets, the distribution of potential customers’ current and future income, and incentives for durable-good dealers to price-discriminate by subsidizing their liquidity-constrained customers’ installment-payment terms. Our empirical analysis takes advantage of a rich set of installment-credit and personal-loan data, which offer considerable support for the assumptions and implications of our theoretical perspective.

Keywords: liquidity constraints; financial market development; Price discrimination (search for similar items in EconPapers)
JEL-codes: D10 D42 G2 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2002-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published - revised version published in: International Economic Review, 2005, 46 (4), 1103-1142

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Related works:
Journal Article: DEALER PRICING OF CONSUMER CREDIT * (2005)
Working Paper: Dealer Pricing of Consumer Credit (2002)
Working Paper: Dealer Pricing of Consumer Credit (2002)
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