IDEAS home Printed from https://ideas.repec.org/p/fip/fedpwp/06-2.html
   My bibliography  Save this paper

Predatory lending in rational world

Author

Listed:
  • Philip Bond
  • David K. Musto
  • Bilge Yilmaz

Abstract

Regulators express growing concern over ?predatory lending,? which we take to mean lending that reduces the expected utility of borrowers. We present a rational model of consumer credit in which such lending is possible, and identify the circumstances in which it arises with and without competition. Predatory lending is associated with imperfect competition, highly collateralized loans, and poorly informed borrowers. Under most circumstances competition among lenders eliminates predatory lending.

Suggested Citation

  • Philip Bond & David K. Musto & Bilge Yilmaz, 2006. "Predatory lending in rational world," Working Papers 06-2, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:06-2
    as

    Download full text from publisher

    File URL: https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2006/wp06-2.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Michael Manove & A. Jorge Padilla, 1999. "Banking (Conservatively) with Optimists," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 324-350, Summer.
    2. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-659, September.
    3. Roman Inderst & Holger M. Mueller, 2006. "Informed Lending and Security Design," Journal of Finance, American Finance Association, vol. 61(5), pages 2137-2162, October.
    4. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters, in: Victor J. Tremblay & Elizabeth Schroeder & Carol Horton Tremblay (ed.), Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74, Edward Elgar Publishing.
    5. Amy Cutts & Robert Order, 2004. "On the Economics of Subprime Lending," The Journal of Real Estate Finance and Economics, Springer, vol. 30(2), pages 167-196, November.
    6. Ausubel, Lawrence M, 1991. "The Failure of Competition in the Credit Card Market," American Economic Review, American Economic Association, vol. 81(1), pages 50-81, March.
    7. Kathleen C. Engel & Patricia A. McCoy, 2001. "The law and economics of remedies of predatory lending," Proceedings 790, Federal Reserve Bank of Chicago.
    8. Louis L. Wilde & Alan Schwartz, 1979. "Equilibrium Comparison Shopping," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 46(3), pages 543-553.
    9. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212.
    10. Steven Salop & Joseph Stiglitz, 1977. "Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 493-510.
    11. Stigler, George J., 2011. "Economics of Information," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 5, pages 35-49.
    12. Stefano DellaVigna & Ulrike Malmendier, 2004. "Contract Design and Self-Control: Theory and Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(2), pages 353-402.
    13. Roberto Quercia & Michael Stegman & Walter Davis, 2004. "Assessing the impact of North Carolina's predatory lending law," Housing Policy Debate, Taylor & Francis Journals, vol. 15(3), pages 573-601.
    14. Schwartz, Alan & Wilde, Louis L, 1982. "Imperfect Information, Monopolistic Competition, and Public Policy," American Economic Review, American Economic Association, vol. 72(2), pages 18-23, May.
    15. Mark J. Flannery & Katherine A. Samolyk, 2005. "Payday lending: do the costs justify the price?," Proceedings 949, Federal Reserve Bank of Chicago.
    16. Manove, Michael & Padilla, A Jorge & Pagano, Marco, 2001. "Collateral versus Project Screening: A Model of Lazy Banks," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 726-744, Winter.
    17. Paul Calem & Jonathan Hershaff & Susan Wachter, 2004. "Neighborhood patterns of subprime lending: Evidence from disparate cities," Housing Policy Debate, Taylor & Francis Journals, vol. 15(3), pages 603-622.
    18. Beales, Howard & Craswell, Richard & Salop, Steven C, 1981. "The Efficient Regulation of Consumer Information," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 491-539, December.
    19. Richard Hynes & Eric A. Posner, 2002. "The Law and Economics of Consumer Finance," American Law and Economics Review, American Law and Economics Association, vol. 4(1), pages 168-207, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Danny Ben-Shahar, 2008. "Default, Credit Scoring, and Loan-to-Value: a Theoretical Analysis under Competitive and Non-Competitive Mortgage Markets," Journal of Real Estate Research, American Real Estate Society, vol. 30(2), pages 161-190.
    2. Elul, Ronel, 2008. "Collateral, credit history, and the financial decelerator," Journal of Financial Intermediation, Elsevier, vol. 17(1), pages 63-88, January.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Philip Bond & David K. Musto & Bilge Yilmaz, 2008. "Predatory mortgage lending," Working Papers 08-24, Federal Reserve Bank of Philadelphia.
    2. Bond, Philip & Musto, David K. & Yilmaz, Bilge, 2009. "Predatory mortgage lending," Journal of Financial Economics, Elsevier, vol. 94(3), pages 412-427, December.
    3. Byrne, David P. & Martin, Leslie A., 2021. "Consumer search and income inequality," International Journal of Industrial Organization, Elsevier, vol. 79(C).
    4. Carlton, Dennis W. & Perloff, Jeffrey M., 1989. "The Economics of Information," Research Reports 25156, University of Connecticut, Food Marketing Policy Center.
    5. repec:hal:spmain:info:hdl:2441/jeo70lroq9p9bmeio80mpgg5h is not listed on IDEAS
    6. Bruce Lyons & Robert Sugden, 2021. "Transactional fairness and pricing practices in consumer markets," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2021-03, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    7. Bruce Carlin & Arna Olafsson & Michaela Pagel, 2017. "FinTech Adoption Across Generations: Financial Fitness in the Information Age," NBER Working Papers 23798, National Bureau of Economic Research, Inc.
    8. Alan Schwartz, 2008. "How Much Irrationality Does the Market Permit?," The Journal of Legal Studies, University of Chicago Press, vol. 37(1), pages 131-159, January.
    9. Antonio Rosato, 2016. "Selling substitute goods to loss-averse consumers: limited availability, bargains, and rip-offs," RAND Journal of Economics, RAND Corporation, vol. 47(3), pages 709-733, August.
    10. Pedro Cosme Costa Vieira, 2004. "Market equilibrium with FSS search," Applied Economics Letters, Taylor & Francis Journals, vol. 11(5), pages 323-324.
    11. Ed Hopkins & Robert M. Seymour, "undated". "Price Dispersion: an Evolutionary Approach," ELSE working papers 043, ESRC Centre on Economics Learning and Social Evolution.
    12. Zakaria Babutsidze, 2017. "Duopolistic Price Competition with Captives," Metroeconomica, Wiley Blackwell, vol. 68(4), pages 903-926, November.
    13. Mark Armstrong, 2015. "Search and Ripoff Externalities," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 273-302, November.
    14. Carlin, Bruce I., 2009. "Strategic price complexity in retail financial markets," Journal of Financial Economics, Elsevier, vol. 91(3), pages 278-287, March.
    15. Huck, Steffen & Zhou, Jidong, 2011. "Consumer behavioural biases in competition: A survey," MPRA Paper 31794, University Library of Munich, Germany.
    16. Stahl, Dale O., 1996. "Oligopolistic pricing with heterogeneous consumer search," International Journal of Industrial Organization, Elsevier, vol. 14(2), pages 243-268.
    17. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899.
    18. Agarwal, Sumit & Chomsisengphet, Souphala & Liu, Chunlin & Souleles, Nicholas S., 2005. "Do consumers choose the right credit contracts?," CFS Working Paper Series 2005/32, Center for Financial Studies (CFS).
    19. Inderst, Roman, 2006. "Consumer Lending When Lenders are More Sophisticated Than Households," CEPR Discussion Papers 5410, C.E.P.R. Discussion Papers.
    20. Michele Dell'Era & Luis Santos-Pinto, 2011. "Entrepreneurial Overconfidence, Self-Financing and Capital Market Efficiency," Cahiers de Recherches Economiques du Département d'économie 11.06, Université de Lausanne, Faculté des HEC, Département d’économie, revised Nov 2012.
    21. Katja Seim & Michael Sinkinson, 2016. "Mixed pricing in online marketplaces," Quantitative Marketing and Economics (QME), Springer, vol. 14(2), pages 129-155, June.

    More about this item

    Keywords

    Predatory lending;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedpwp:06-2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Beth Paul (email available below). General contact details of provider: https://edirc.repec.org/data/frbphus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.