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Liquidity Constraints and Imperfect Information in Subprime Lending

  • William Adams
  • Liran Einav
  • Jonathan Levin

We present new evidence on consumer liquidity constraints and the credit market conditions that might give rise to them. We analyze unique data from a large auto sales company serving the subprime market. Short-term liquidity appears to be a key driver of consumer behavior. Demand increases sharply during tax rebate season and purchases are highly sensitive to down-payment requirements. Lenders also face substantial informational problems. Default rates rise significantly with loan size, providing a rationale for loan caps, and higher-risk borrowers demand larger loans. This adverse selection is mitigated, however, by risk-based pricing. (JEL D14, D82, D83, G21)

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 99 (2009)
Issue (Month): 1 (March)
Pages: 49-84

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Handle: RePEc:aea:aecrev:v:99:y:2009:i:1:p:49-84
Note: DOI: 10.1257/aer.99.1.49
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  18. Karlan, Dean S. & Zinman, Jonathan, 2007. "Credit Elasticities in Less-Developed Economies: Implications for Microfinance," CEPR Discussion Papers 6071, C.E.P.R. Discussion Papers.
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