Competition and Selection in Credit Markets

Constantine Yannelis and Anthony Lee Zhang

No 29169, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D14 D4 G20 G21 G5 L62 (search for similar items in EconPapers)
Date: 2021-08
New Economics Papers: this item is included in nep-ban, nep-com, nep-cwa, nep-fdg, nep-isf and nep-mic
Note: CF IO PE PR
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Citations: View citations in EconPapers (2)

Published as Constantine Yannelis & Anthony Lee Zhang, 2023. "Competition and selection in credit markets," Journal of Financial Economics, vol 150(2).

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