Information asymmetries are prominent in theory but difficult to estimate.
This paper exploits discontinuities in loan eligibility to test
for moral hazard and adverse selection in the payday loan market.
Regression discontinuity and regression kink approaches suggest that
payday borrowers are less likely to default on larger loans. A $50
larger payday loan leads to a 17 to 33 percent drop in the probability
of default. Conversely, there is economically and statistically significant
adverse selection into larger payday loans when loan eligibility
is held constant. Payday borrowers who choose a $50 larger loan are
16 to 47 percent more likely to default.
"Information Asymmetries in Consumer Credit Markets: Evidence from Payday Lending." American Economic Journal: Applied Economics,
Household Saving; Personal Finance
Asymmetric and Private Information; Mechanism Design
Banks; Depository Institutions; Micro Finance Institutions; Mortgages