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The Cost of Consumer Collateral: Evidence From Bunching

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  • Benjamin L. Collier
  • Cameron M. Ellis
  • Benjamin J. Keys

Abstract

How do collateral requirements impact consumer borrowing behavior? Using administrative loan application and performance data from the U.S. Federal Disaster Loan Program, we exploit a loan amount threshold above which households must post their residence as collateral. Our bunching estimates suggest that the median borrower is willing to give up 40% of their loan amount to avoid posting collateral. Exploiting time variation in the threshold, we estimate collateral causally reduces default rates by 36%. Finally, we structurally estimate households' attachment to their homes, net of any equity, and find a median value of $11,000. Attachment creates a wedge between lender and borrower valuation of collateral of 15%. Our results explain high perceived default costs in the mortgage market, and document the importance of collateral for reducing moral hazard in consumer credit markets.

Suggested Citation

  • Benjamin L. Collier & Cameron M. Ellis & Benjamin J. Keys, 2025. "The Cost of Consumer Collateral: Evidence From Bunching," Econometrica, Econometric Society, vol. 93(3), pages 779-819, May.
    • Handle: RePEc:wly:emetrp:v:93:y:2025:i:3:p:779-819
    DOI: 10.3982/ECTA22303
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