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American Economic Review: Vol. 99 No. 1 (March 2009)

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Liquidity Constraints and Imperfect Information in Subprime Lending

Article Citation

Adams, William, Liran Einav, and Jonathan Levin. 2009. "Liquidity Constraints and Imperfect Information in Subprime Lending." American Economic Review, 99(1): 49-84.

DOI: 10.1257/aer.99.1.49

Abstract

We present new evidence on consumer liquidity constraints and the credit market conditions that might give rise to them. We analyze unique data from a large auto sales company serving the subprime market. Short-term liquidity appears to be a key driver of consumer behavior. Demand increases sharply during tax rebate season and purchases are highly sensitive to down-payment requirements. Lenders also face substantial informational problems. Default rates rise significantly with loan size, providing a rationale for loan caps, and higher-risk borrowers demand larger loans. This adverse selection is mitigated, however, by risk-based pricing. (JEL D14, D82, D83, G21)

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Authors

Adams, William (Citigroup Inc, New York)
Einav, Liran (Stanford U)
Levin, Jonathan (Stanford U)

JEL Classifications

D14: Personal Finance
D82: Asymmetric and Private Information
D83: Search; Learning; Information and Knowledge; Communication; Belief
G21: Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages


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