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Subprime Consumer Credit Demand: Evidence from a Lender's Pricing Experiment

  • Alan, Sule
  • Lóránth, Gyöngyi

Using a unique panel data set from a UK credit card company, we analyze the interest rate sensitivity of subprime credit card borrowers. In addition to all individual transactions and loan terms, we also have access to details of a randomized interest rate experiment conducted by the lender on the existing (inframarginal) loans. Access to such information by academic researchers is rare. The data and the experimental design provide us with a clean identification of heterogenous interest rate sensitivities across borrower types within the subprime population. We find that subprime credit card borrowers generally do not reduce their demand for credit when subject to increases in interest rates. However, we estimate a number of interesting responses that suggest that subprime borrowers are not a homogenous group. The paper also contributes to the literature by demonstrating the importance of isolating exogenous variation in interest rates. We show that estimating a standard credit demand equation with the non-experimental variation in the data leads to severely biased estimates. This is true even when conditioning on a rich set of controls and individual fixed effects.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9210.

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Date of creation: Nov 2012
Date of revision:
Handle: RePEc:cpr:ceprdp:9210
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References listed on IDEAS
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  1. Sule Alan, 2005. "Entry Costs and Stock Market Participation Over the Life Cycle," Social and Economic Dimensions of an Aging Population Research Papers 126, McMaster University.
  2. Sule Alan & Martin Browning, 2010. "Estimating Intertemporal Allocation Parameters using Synthetic Residual Estimation," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1231-1261.
  3. Dean S. Karlan & Jonathan Zinman, 2008. "Credit Elasticities in Less-Developed Economies: Implications for Microfinance," American Economic Review, American Economic Association, vol. 98(3), pages 1040-68, June.
  4. Orazio P. Attanasio & James Banks & Costas Meghir & Guglielmo Weber, 1995. "Humps and Bumps in Lifetime Consumption," NBER Working Papers 5350, National Bureau of Economic Research, Inc.
  5. repec:oup:qjecon:v:117:y:2002:i:1:p:149-185 is not listed on IDEAS
  6. John A. List & Sally Sadoff & Mathis Wagner, 2010. "So you want to run an experiment, now what? Some Simple Rules of Thumb for Optimal Experimental Design," CeRP Working Papers 94, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  7. William Adams & Liran Einav & Jonathan Levin, 2007. "Liquidity Constraints and Imperfect Information in Subprime Lending," NBER Working Papers 13067, National Bureau of Economic Research, Inc.
  8. Dehejia, Rajeev & Montgomery, Heather & Morduch, Jonathan, 2012. "Do interest rates matter? Credit demand in the Dhaka slums," Journal of Development Economics, Elsevier, vol. 97(2), pages 437-449.
  9. repec:oup:qjecon:v:92:y:1978:i:2:p:279-96 is not listed on IDEAS
  10. Alessie, Rob & Hochguertel, Stefan & Weber, Guglielmo, 2001. "Consumer Credit: Evidence from Italian Micro Data," CEPR Discussion Papers 3071, C.E.P.R. Discussion Papers.
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