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

  • Sule Alan

    ()

    (Faculty of Economics and CFAP University of Cambridge, UK and Koc University, Turkey)

  • Ruxandra Dumitrescu

    (Faculty of Economics and CFAP University of Cambridge, UK)

  • Gyongyi Loranth

    (Faculty of Business, Economics and Statistics University of Vienna and CEPR)

We test the interest rate sensitivity of subprime credit card borrowers using a unique panel data set from a UK credit card company. We were given details of a randomized interest rate experiment conducted by the lender between October 2006 and January 2007. Access to such information is rare. We first calibrate an intertemporal consumption model to show that the experimental design has sufficient statistical power to detect economically plausible responses among borrowers. We then find that individuals who tend to utilize their credit limits fully do not reduce their demand for credit when subject to increases in interest rates as high as 3 percentage points. This finding is naturally interpreted as evidence of binding liquidity constraints. We also demonstrate the importance of isolating exogenous variation in interest rates when estimating credit demand elasticities. We show that estimating a standard credit demand equation with the nonexperimental 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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File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1105.pdf
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Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1105.

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Length: 39 pages
Date of creation: Mar 2011
Date of revision:
Handle: RePEc:koc:wpaper:1105
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  1. John List & Mathis Wagner & Sally Sadoff, 2010. "So you want to run an experiment, now what? Some simple rules of thumb for optimal experimental design," Artefactual Field Experiments 00094, The Field Experiments Website.
  2. 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.
  3. Karlan, Dean S. & Zinman, Jonathan, 2007. "Credit Elasticities in Less-Developed Economies: Implications for Microfinance," CEPR Discussion Papers 6071, C.E.P.R. Discussion Papers.
  4. 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.
  5. Attanasio, Orazio P, et al, 1999. "Humps and Bumps in Lifetime Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(1), pages 22-35, January.
  6. Rob Alessie & Stefan Hochguertel & Guglielmo Weber, 2005. "Consumer Credit: Evidence From Italian Micro Data," Journal of the European Economic Association, MIT Press, vol. 3(1), pages 144-178, 03.
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