Does the Good Matter? Evidence on Moral Hazard and Adverse Selection from Consumer Credit Market
Default rates on instalment loans vary with type of the good purchased. Using an Italian dataset of instalment loans between 1995-1999, we first show that the variation persists even after controlling for contract and individual-specific characteristics, and for the potential selection bias due to credit rationing. We explore whether the residual variation in the default rates across the different types of goods is due to unobserved individual heterogeneity (selection effect) or due to the effect of the specific characteristics of the good (good effect). We claim that the two effects may be interpreted as adverse selection and moral hazard. We exploit the data on multiple contracts per individual to disentangle the two effects, and find that most of the variation is explained by the selection effect. Individuals who buy motorcycles on credit are more likely to default on any loan, while those buying kitchen appliances, furniture and computers are more likely to repay, compared to average. We conclude that there is asymmetric information in the consumer credit market, mostly in the form of adverse selection.
|Date of creation:||2007|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.eui.eu/ECO/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Charles Grant & Mario Padula, 2006. "Informal Credit Markets, Judicial Costs and Consumer Credit: Evidence from Firm Level Data," CSEF Working Papers 155, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
- Elisabetta Iossa & Giuliana Palumbo, 2004. "Product quality, lender liability, and consumer credit," Oxford Economic Papers, Oxford University Press, vol. 56(2), pages 331-343, April.
- Orazio Attanasio & Pinelopi K. Goldberg & Ekaterini Kyriazidou, 2000.
"Credit Constraints in the Market for Consumer Durables: Evidence from Micro Data on Car Loans,"
NBER Working Papers
7694, National Bureau of Economic Research, Inc.
- Orazio P. Attanasio & Pinelopi Koujianou Goldberg & Ekaterini Kyriazidou, 2008. "Credit Constraints In The Market For Consumer Durables: Evidence From Micro Data On Car Loans," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(2), pages 401-436, 05.
- Bertola, Giuseppe & Hochguertel, Stefan & Koeniger, Winfried, 2002.
"Dealer Pricing of Consumer Credit,"
IZA Discussion Papers
440, Institute for the Study of Labor (IZA).
- Giuseppe Bertola & Stefan Hochguertel & Winfried Koeniger, 2005. "Dealer Pricing Of Consumer Credit ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(4), pages 1103-1142, November.
- Bertola, Giuseppe & Stefan Hochguertel & Winfried Koeniger (YE), 2002. "Dealer Pricing of Consumer Credit," Royal Economic Society Annual Conference 2002 24, Royal Economic Society.
- Bertola, Giuseppe & Hochguertel, Stefan & Koeniger, Winfried, 2002. "Dealer Pricing of Consumer Credit," CEPR Discussion Papers 3160, C.E.P.R. Discussion Papers.
- Wang, Hung-Jen & White, Michelle J, 2000.
"An Optimal Personal Bankruptcy Procedure and Proposed Reforms,"
The Journal of Legal Studies,
University of Chicago Press, vol. 29(1), pages 255-86, January.
- Wang, H.J. & White, M., 1998. "An Optimal Personal Bankruptcy Procedure and Proposed Reform," Papers 98-07, Michigan - Center for Research on Economic & Social Theory.
- Alessie, Rob & Hochguertel, Stefan & Weber, Guglielmo, 2001.
"Consumer Credit: Evidence from Italian Micro Data,"
CEPR Discussion Papers
3071, C.E.P.R. Discussion Papers.
- Michael E. Staten & John M. Barron & Andrew B. Chong, 2004. "The Emergence of Captive Finance Companies and Risk Segmentation of the Consumer Loan Market:Theory and Evidence," Econometric Society 2004 Far Eastern Meetings 584, Econometric Society.
- Luca Casolaro & Leonardo Gambacorta & Luigi Guiso, 2005. "Regulation, formal and informal enforcement and the development of the household loan market. Lessons from Italy," Temi di discussione (Economic working papers) 560, Bank of Italy, Economic Research and International Relations Area.
When requesting a correction, please mention this item's handle: RePEc:eui:euiwps:eco2007/02. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rhoda Lane)
If references are entirely missing, you can add them using this form.