Subprime Consumer Credit Demand: Evidence from a Lender's Pricing Experiment

Sule Alan, Ruxandra Dumitrescu and Gyongyi Loranth
Additional contact information
Ruxandra Dumitrescu: Faculty of Economics and CFAP University of Cambridge, UK
Gyongyi Loranth: Faculty of Business, Economics and Statistics University of Vienna and CEPR

Koç University-TUSIAD Economic Research Forum Working Papers from Koc University-TUSIAD Economic Research Forum

Abstract: We test the interest rate sensitivity of subprime credit card borrowers using a unique panel data set from a UK credit card company. We were given details of a randomized interest rate experiment conducted by the lender between October 2006 and January 2007. Access to such information is rare. We first calibrate an intertemporal consumption model to show that the experimental design has sufficient statistical power to detect economically plausible responses among borrowers. We then 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 isolating exogenous variation in interest rates when estimating credit demand elasticities. We show that estimating a standard credit demand equation with the nonexperimental variation in the data leads to severely biased estimates. This is true even when conditioning on a rich set of controls and individual fixed effects.

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: 39 pages
Date: 2011-03
New Economics Papers: this item is included in nep-ban and nep-exp
References: View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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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?sPricing Experiment (2011)
Working Paper: Subprime consumer credit demand: evidence from a lender's pricing experiment (2011)
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