Does the Good Matter? Evidence on Moral Hazard and Adverse Selection from Consumer Credit Market
AbstractDefault rates on instalment loans vary with type of the good purchased. Using an Italian dataset of instalment loans between 1995-1999, we first show that the variation persists even after controlling for contract and individual-specific characteristics, and for the potential selection bias due to credit rationing. We explore whether the residual variation in default rates across different types of goods is due to unobserved individual heterogeneity (selection effect) or due to the effect of the specific characteristics of the good (good effect). We claim that the two effects may be interpreted as adverse selection and moral hazard. We exploit the data on multiple contracts per individual to disentangle the two effects, and find that both contribute to the residual variation. The selection effect, however, is more prevalent: individuals who buy motorcycles on credit are more likely to default on any loan, while those buying kitchen appliances, furniture and computers are more likely to repay, compared to average. The good effect is present only for two goods: new cars, which increase the incentive to repay, and mobile phones, which reduce it. We conclude that there is asymmetric information in the consumer credit market, in the form of both adverse selection and moral hazard.
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Bibliographic InfoArticle provided by GDE (Giornale degli Economisti e Annali di Economia), Bocconi University in its journal Giornale degli Economisti e Annali di Economia.
Volume (Year): 66 (2007)
Issue (Month): 1 (March)
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Other versions of this item:
- Alena Bicakova, 2007. "Does the Good Matter? Evidence on Moral Hazard and Adverse Selection from Consumer Credit Market," Economics Working Papers ECO2007/02, European University Institute.
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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