Liquidity Constraints and Imperfect Information in Subprime Lending
American Economic Review
vol. 99,
no. 1, March 2009
(pp. 49-84)
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)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.99.1.49Additional Materials
JEL Classification
- 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