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Overcoming Information Asymmetries in Low-Income Lending: Lessons from the “Working Wheels” Program

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  • Jessica Holmes

    ()
    (Department of Economics, Middlebury College)

  • Jonathan Isham

    ()
    (Department of Economics, Middlebury College)

  • Jessica Wasilewski

    ()
    (Department of Economics, Middlebury College)

Abstract

Without access to transportation, the welfare-to-work transition is nearly impossible, yet little is known about the effectiveness of programs designed to improve credit access. Since 1998, Vermont's TANF funds have provided automobile loans through the “Working Wheels” program. We use microlevel data from this program to explore how to cost-effectively provide loans to clients who cannot obtain affordable loans elsewhere. Our results verify the importance of relationship lending, particularly among those without documented credit histories. In the presence of information asymmetries about credit history, our results justify the increased trust placed in clients with whom the bank has a stronger relationship; such clients, ceteris paribus, are less likely to default. We conclude that in the current climate of welfare reform, policymakers should consider programs that encourage welfare recipients to establish and maintain relationships with financial institutions in order to facilitate access to credit and minimize the risk of default.

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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 72 (2005)
Issue (Month): 2 (October)
Pages: 329–351

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Handle: RePEc:sej:ancoec:v:72:2:y:2005:p:329-351

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References

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Cited by:
  1. Jessica A. Holmes & Jonathan T. Isham & Paul M. Sommers, 2007. "Is George Bailey Dead?," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(1), pages 19-24, January.
  2. Jessica Holmes & Jonathan Isham & Ryan Petersen & Paul Sommers, 2005. "Does Relationship Lending Still Matter in the Consumer Banking Sector? Evidence from Two Financial Service Organizations in Vermont," Middlebury College Working Paper Series 0511, Middlebury College, Department of Economics.

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