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The Extension of Credit with Nonexclusive Contracts and Sequential Banking Externalities

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  • Giacomo De Giorgi
  • Andres Drenik
  • Enrique Seira

Abstract

Nonexclusive sequential borrowing can increase default and impose externalities on prior lenders. We document that sequential banking is pervasive with substantial effects. Using credit card applications from a large bank and data on the applicants' entire loan portfolios, we find that an additional credit line causes a 5.9 percentage point decline in default for high-score borrowers on previous loans. However, for low-score borrowers, it causes a 19 percentage point increase. The former use the new credit to smooth payments on preexisting loans, while the latter increase their total debt. These results have implications for "no-universal-default" regulation and financial inclusion.

Suggested Citation

  • Giacomo De Giorgi & Andres Drenik & Enrique Seira, 2023. "The Extension of Credit with Nonexclusive Contracts and Sequential Banking Externalities," American Economic Journal: Economic Policy, American Economic Association, vol. 15(1), pages 233-271, February.
    • Handle: RePEc:aea:aejpol:v:15:y:2023:i:1:p:233-71
    DOI: 10.1257/pol.20200220
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    More about this item

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • 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
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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