Dealer Pricing of Consumer Credit
AbstractInterest 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3160.
Date of creation: Jan 2002
Date of revision:
Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
Other versions of this item:
- Giuseppe Bertola & Stefan Hochguertel & Winfried Koeniger, 2005. "Dealer Pricing Of Consumer Credit ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(4), pages 1103-1142, November.
- Bertola, Giuseppe & Hochguertel, Stefan & Koeniger, Winfried, 2002. "Dealer Pricing of Consumer Credit," IZA Discussion Papers 440, Institute for the Study of Labor (IZA).
- Bertola, Giuseppe & Stefan Hochguertel & Winfried Koeniger (YE), 2002. "Dealer Pricing of Consumer Credit," Royal Economic Society Annual Conference 2002 24, Royal Economic Society.
- D10 - Microeconomics - - Household Behavior - - - General
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- G20 - Financial Economics - - Financial Institutions and Services - - - General
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- repec:bla:restud:v:72:y:2005:i:4:p:973-1007 is not listed on IDEAS
- Spence, A Michael, 1977. "Consumer Misperceptions, Product Failure and Producer Liability," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 561-72, October.
- 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.
- Alessie, Rob & Devereux, Michael P. & Weber, Guglielmo, 1997. "Intertemporal consumption, durables and liquidity constraints: A cohort analysis," European Economic Review, Elsevier, vol. 41(1), pages 37-59, January.
- Alessie, Rob & Hochguertel, Stefan & Weber, Guglielmo, 2001.
"Consumer Credit: Evidence from Italian Micro Data,"
CEPR Discussion Papers
3071, C.E.P.R. Discussion Papers.
- 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.
- Attanasio, O., 1994. "The intertemporal allocation of consumption: theory and evidence," Open Access publications from University College London http://discovery.ucl.ac.u, University College London.
- Orazio P. Attanasio, 1994. "The Intertemporal Allocation of Consumption: Theory and Evidence," NBER Working Papers 4811, National Bureau of Economic Research, Inc.
- 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.
- 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.
- 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.
- Elisabetta Iossa & Giuliana Palumbo, 2006. "Overoptimism and Lender Liability in the Consumer Credit Market," Temi di discussione (Economic working papers) 598, Bank of Italy, Economic Research and International Relations Area.
- Winfried Koeniger & Thomas Hintermaier, 2007. "Incomplete Markets and the Evolution of US Consumer Debt," 2007 Meeting Papers 256, Society for Economic Dynamics.
- 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.
- Alena Bicakova, 2007. "Does the Good Matter? Evidence on Moral Hazard and Adverse Selection from Consumer Credit Market," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 66(1), pages 29-66, March.
- Epstein, Gil S., 2002.
"Informational Cascades and Decision to Migrate,"
IZA Discussion Papers
445, Institute for the Study of Labor (IZA).
- 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.
- 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).
- 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".
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.