American Economic Journal: Economic Policy
no. 1, February 2023
Nonexclusive sequential borrowing can increase default and impose externalities on prior lenders. We document that sequential banking is pervasive with substantial effects. Using credit card applications from a large bank and data on the applicants' entire loan portfolios, we find that an additional credit line causes a 5.9 percentage point decline in default for high-score borrowers on previous loans. However, for low-score borrowers, it causes a 19 percentage point increase. The former use the new credit to smooth payments on preexisting loans, while the latter increase their total debt. These results have implications for "no-universal-default" regulation and financial inclusion.
De Giorgi, Giacomo, Andres Drenik, and Enrique Seira.
"The Extension of Credit with Nonexclusive Contracts and Sequential Banking Externalities."
American Economic Journal: Economic Policy,
Asymmetric and Private Information; Mechanism Design
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Household Finance: Household Saving, Borrowing, Debt, and Wealth