Real Effects of Search Frictions in Consumer Credit Markets

Bronson Argyle (), Taylor D. Nadauld and Christopher Palmer

No 26645, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We establish two underappreciated facts about costly search. First, unless demand is perfectly inelastic, search frictions can result in significant deadweight loss by decreasing consumption. Second, whenever cross-price elasticities are non-zero, costly search in one market also affects quantities in other markets. As predicted by our model of search for credit under elastic demand, we show that search frictions in credit markets contribute to price dispersion, affect loan sizes, and decrease final-goods consumption. Using microdata from millions of auto-loan applications and originations not intermediated by car dealers, we isolate plausibly exogenous variation in interest rates due to institution-specific pricing rules that price risk with step functions. These within-lender discontinuities lead to substantial variation in the benefits of search across lenders and distort extensive- and intensive-margin loan and car choices differentially in high- versus low-search-cost areas. Our results demonstrate real effects of the costliness of shopping for credit and the continued importance of local bank branches for borrower outcomes even in the mobile-banking era. More broadly, we conclude that costly search affects consumption in both primary and complementary markets.

JEL-codes: D12 D83 E43 G21 L11 (search for similar items in EconPapers)
Date: 2020-01
New Economics Papers: this item is included in nep-com, nep-mac and nep-ore
Note: CF IO PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as Bronson Argyle & Taylor Nadauld & Christopher Palmer & Gregor Matvos, 2023. "Real Effects of Search Frictions in Consumer Credit Markets," The Review of Financial Studies, vol 36(7), pages 2685-2720.

Downloads: (external link)
http://www.nber.org/papers/w26645.pdf (application/pdf)

Related works:
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:nbr:nberwo:26645

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w26645

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().