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Information Asymmetries in Consumer Credit Markets: Evidence from Payday Lending

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  • Will Dobbie
  • Paige Marta Skiba

Abstract

Information asymmetries are prominent in theory but difficult to estimate. This paper exploits discontinuities in loan eligibility to test for moral hazard and adverse selection in the payday loan market. Regression discontinuity and regression kink approaches suggest that payday borrowers are less likely to default on larger loans. A $50 larger payday loan leads to a 17 to 33 percent drop in the probability of default. Conversely, there is economically and statistically significant adverse selection into larger payday loans when loan eligibility is held constant. Payday borrowers who choose a $50 larger loan are 16 to 47 percent more likely to default.

Suggested Citation

  • Will Dobbie & Paige Marta Skiba, 2013. "Information Asymmetries in Consumer Credit Markets: Evidence from Payday Lending," American Economic Journal: Applied Economics, American Economic Association, vol. 5(4), pages 256-282, October.
    • Handle: RePEc:aea:aejapp:v:5:y:2013:i:4:p:256-82
    Note: DOI: 10.1257/app.5.4.256
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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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    1. Information Asymmetries in Consumer Credit Markets: Evidence from Payday Lending (American Economic Journal: Applied Economics 2013) in ReplicationWiki

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