Searching for Approval

Sumit Agarwal, John Grigsby, Ali Hortaçsu, Gregor Matvos and Amit Seru
Additional contact information
Sumit Agarwal: National University of Singapore
John Grigsby: Princeton University
Ali Hortaçsu: University of Chicago
Gregor Matvos: Northwestern University

Working Papers from Princeton University. Economics Department.

Abstract: We study the interaction of search and application approval in credit markets. We combine a unique dataset, which details search behavior for a large sample of mortgage borrowers, with loan application and rejection decisions. Our data reveal substantial dispersion in mortgage rates and search intensity, conditional on observables. However, in contrast to predictions of standard search models, we find a novel non-monotonic relationship between search and realized prices: borrowers, who search a lot, obtain more expensive mortgages than borrowers' with less frequent search. The evidence suggests that this occurs because lenders screen borrowers' creditworthiness, rejecting unworthy borrowers, which differentiates consumer credit markets from other search markets. Based on these insights, we build a model that combines search and screening in presence of asymmetric information. Risky borrowers internalize the probability that their application is rejected, and behave as if they had higher search costs. The model rationalizes the relationship between search, interest rates, defaults, and application rejections, and highlights the tight link between credit standards and pricing. We estimate the parameters of the model and study several counterfactuals. The model suggests that "overpayment" may be a poor proxy for consumer unsophistication since it partly represents rational search in presence of rejections. Moreover, the development of improved screening technologies from AI and big data (i.e., fintech lending) could endogenously lead to more severe adverse selection in credit markets. Finally, place based policies, such as the Community Reinvestment Act, may affect equilibrium prices through endogenous search responses rather than increased credit risk.

Keywords: credit markets; household finance (search for similar items in EconPapers)
JEL-codes: G21 G50 G51 G53 L00 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-big, nep-pay, nep-sea and nep-ure
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://drive.google.com/file/d/1WWtaOsHjd1uRCQMs8wqm_KzVwJHh2HhI/view

Related works:
Journal Article: Searching for Approval (2024)
Working Paper: Searching for Approval (2020)
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:pri:econom:2020-1

Access Statistics for this paper

More papers in Working Papers from Princeton University. Economics Department. Contact information at EDIRC.
Bibliographic data for series maintained by Bobray Bordelon ().