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

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  • Jessica Holmes

    ()

  • Jonathan Isham

    ()

  • Jessica Wasilewski

Abstract

Without access to reliable transportation, the welfare-to-work transition for low-income households is nearly impossible, yet very little is known about the effectiveness of targeted loan programs designed to improve their access to credit. Since 1998, Vermont's TANF funds have been used to provide automobile loans to low-income residents through the "Working Wheels" program of the Vermont development Credit Union. In this paper, we take advantage of unique micro-level data on Working Wheels loan applications and loan performance to explore how such programs can cost-effectively provide car loans to those who are unable to obtain affordable loans elsewhere. Our results verify the importance of relationship lending, particularly among those without documented credit histories. In the presence of pronounced information asymmetries about credit history, our results justify a loan officer's increased trust in a client with whom the bank has had 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 affordable credit and to minimize the risk of loan default.

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File URL: http://www.middlebury.edu/services/econ/repec/mdl/ancoec/0244R.pdf
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Bibliographic Info

Paper provided by Middlebury College, Department of Economics in its series Middlebury College Working Paper Series with number 0244r.

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Length: 41 pages
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:mdl:mdlpap:0244r

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Related research

Keywords: low-income lending; relationship lending; information asymmetries; automobile loans; credit-rationing; social capital;

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References

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  1. Leonard I. Nakamura, 1993. "Recent research in commercial banking: information and lending," Working Papers 93-24, Federal Reserve Bank of Philadelphia.
  2. Jaffee, Dwight & Stiglitz, Joseph, 1990. "Credit rationing," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 16, pages 837-888 Elsevier.
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  16. Blackwell, David W & Winters, Drew B, 1997. "Banking Relationships and the Effect of Monitoring on Loan Pricing," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 20(2), pages 275-89, Summer.
  17. Allen N. Berger & Gregory F. Udell, 2002. "Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure," Economic Journal, Royal Economic Society, vol. 112(477), pages F32-F53, February.
  18. Hellmuth Milde & John G. Riley, 1986. "Signalling in Credit Markets," UCLA Economics Working Papers 334, UCLA Department of Economics.
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Cited by:
  1. 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.
  2. 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.

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