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Dealer Pricing of Consumer Credit

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  • Bertola, Giuseppe
  • Hochguertel, Stefan
  • Koeniger, Winfried

Abstract

Interest rates on consumer lending are lower when funds are tied to purchase of a durable good than when they are made available on an unconditional basis. Further, dealers often choose to bear the financial cost of their customers’ credit purchases. This Paper interprets this phenomenon in terms of monopolistic price discrimination. We characterize consumers’ intertemporal consumption decisions when their borrowing and lending rates are different not only from each other, but also from the internal rate of return of financing terms for a specific durable good purchase. A stylized model offers a closed-form characterization of purchase decisions as a function of the amount and timing of consumers’ resources, of the spread between the borrowing and lending rates, and of the pricing of cash and credit purchases. We then study theoretical and empirical relationships between the structure of financial markets, the distribution of potential customers’ current and future income, and incentives for durable-good dealers to price-discriminate by subsidizing their liquidity-constrained customers’ installment-payment terms. Our empirical analysis takes advantage of a rich set of installment-credit and personal-loan data, which offer considerable support for the assumptions and implications of our theoretical perspective.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3160.

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Date of creation: Jan 2002
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Handle: RePEc:cpr:ceprdp:3160

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Keywords: financial market development; liquidity constraints; price discrimination;

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  1. repec:bla:restud:v:72:y:2005:i:4:p:973-1007 is not listed on IDEAS
  2. Spence, A Michael, 1977. "Consumer Misperceptions, Product Failure and Producer Liability," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 561-72, October.
  3. Alessi, R & Michael Devereux & Guglielmo Weber, 1993. "Intertemporal consumption, durables and liquidity constraints: a cohort analysis," IFS Working Papers W93/07, Institute for Fiscal Studies.
  4. Alessie, Rob & Hochguertel, Stefan & Weber, Guglielmo, 2001. "Consumer Credit: Evidence from Italian Micro Data," CEPR Discussion Papers 3071, C.E.P.R. Discussion Papers.
  5. Attanasio, Orazio P., 1995. "The intertemporal allocation of consumption: theory and evidence," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 39-56, June.
  6. F. Thomas Juster & Robert P. Shay, 1964. "Consumer Sensitivity to Finance Rates: An Empirical and Analytical Investigation," NBER Books, National Bureau of Economic Research, Inc, number just64-2, October.
  7. Pissarides, Christopher A, 1978. "Liquidity Considerations in the Theory of Consumption," The Quarterly Journal of Economics, MIT Press, vol. 92(2), pages 279-96, May.
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Cited by:
  1. Elisabetta Iossa & Giuliana Palumbo, 2010. "Over-optimism and lender liability in the consumer credit market," Oxford Economic Papers, Oxford University Press, vol. 62(2), pages 374-394, April.
  2. Winfried Koeniger & Thomas Hintermaier, 2007. "Incomplete Markets and the Evolution of US Consumer Debt," 2007 Meeting Papers 256, Society for Economic Dynamics.
  3. 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.
  4. Epstein, Gil S., 2002. "Informational Cascades and Decision to Migrate," IZA Discussion Papers 445, Institute for the Study of Labor (IZA).
  5. Charles Grant & Mario Padula, 2012. "Using Bounds to Investigate Household Debt Repayment Behaviour," CEDI Discussion Paper Series 12-06, Centre for Economic Development and Institutions(CEDI), Brunel University.
  6. Serena Trucchi, 2011. "How credit markets affect homeownership: an explanation based on differences between Italian regions," CeRP Working Papers 122, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  7. Mario Padula & Charles Grant, 2007. "Bounds on repayment behavior: evidence for the consumer credit market," Working Papers 2007_26, Department of Economics, University of Venice "Ca' Foscari".

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