Overcoming Information Asymmetries in Low-Income Lending: Lessons from the 'Working Wheels' Program
Without access to reliable transportation, the welfare-to-work transition for low-income households is nearly impossible, yet very little is known about the effectiveness of targeted loan programs designed to improve their access to credit. Since 1998, Vermont's TANF funds have been used to provide automobile loans to low-income residents through the "Working Wheels" program of the Vermont development Credit Union. In this paper, we take advantage of unique micro-level data on Working Wheels loan applications and loan performance to explore how such programs can cost-effectively provide car loans to those who are unable to obtain affordable loans elsewhere. Our results verify the importance of relationship lending, particularly among those without documented credit histories. In the presence of pronounced information asymmetries about credit history, our results justify a loan officer's increased trust in a client with whom the bank has had a stronger relationship; such clients, ceteris paribus, are less likely to default. We conclude that in the current climate of welfare reform, policymakers should consider programs that encourage welfare recipients to establish and maintain relationships with financial institutions in order to facilitate access to affordable credit and to minimize the risk of loan default.
|Date of creation:||Apr 2004|
|Contact details of provider:|| |
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.:
- Holzer Harry J. & Ihlanfeldt Keith R. & Sjoquist David L., 1994. "Work, Search, and Travel among White and Black Youth," Journal of Urban Economics, Elsevier, vol. 35(3), pages 320-345, May.
- Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
- Dwight M. Jaffee & Thomas Russell, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 651-666.
- Robert B. Avery & Raphael W. Bostic & Paul S. Calem & Glenn B. Canner, 1996. "Credit risk, credit scoring, and the performance of home mortgages," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jul, pages 621-648.
- Cole, Rebel A., 1998. "The importance of relationships to the availability of credit," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 959-977, August.
- Marcelo Siles & Steven D. Hanson & Lindon J. Robison, 1994. "Socio-Economics and the Probability of Loan Approval," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 16(3), pages 363-372.
- Blackwell, David W & Winters, Drew B, 1997. "Banking Relationships and the Effect of Monitoring on Loan Pricing," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(2), pages 275-289, Summer.
- Schmid, A. Allan & Robison, Lindon J., 1995.
"Applications Of Social Capital Theory,"
Journal of Agricultural and Applied Economics,
Southern Agricultural Economics Association, vol. 27(01), July.
- O'Regan, Katherine M. & Quigley, John M., 1998.
"Accessibility and Economic Opportunity,"
Berkeley Program on Housing and Urban Policy, Working Paper Series
qt94s780fq, Berkeley Program on Housing and Urban Policy.
- John M. Quigley & Katherine M. O'Regan, 1998. "Accessibility and Economic Opportunity," Yale School of Management Working Papers ysm100, Yale School of Management.
- O'Regan, Katherine M. & Quigley, John M., 1997. "Accessibility and Economic Opportunity," University of California Transportation Center, Working Papers qt37h6t700, University of California Transportation Center.
- Hellmuth Milde & John G. Riley, 1988. "Signaling in Credit Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 103(1), pages 101-129.
- Steven Raphael & Lorien Rice, 2000.
"Car Ownership, Employment, and Earnings,"
JCPR Working Papers
179, Northwestern University/University of Chicago Joint Center for Poverty Research.
- Perraudin, William R M & Sorensen, Bent E, 1992. "The Credit-Constrained Consumer: An Empirical Study of Demand and Supply in the Loan Market," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(2), pages 179-192, April.
- Jaffee, Dwight & Stiglitz, Joseph, 1990. "Credit rationing," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 16, pages 837-888 Elsevier.
- Boyes, William J. & Hoffman, Dennis L. & Low, Stuart A., 1989. "An econometric analysis of the bank credit scoring problem," Journal of Econometrics, Elsevier, vol. 40(1), pages 3-14, January.
- Allen N. Berger & Gregory F. Udell, 2002.
"Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure,"
Royal Economic Society, vol. 112(477), pages 32-53, February.
- Allen N. Berger & Gregory F. Udell, 2001. "Small business credit availability and relationship lending: the importance of bank organizational structure," Finance and Economics Discussion Series 2001-36, Board of Governors of the Federal Reserve System (U.S.).
- Stiglitz, Joseph E & Weiss, Andrew, 1992. "Asymmetric Information in Credit Markets and Its Implications for Macro-economics," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 694-724, October.
- Stephen D. Williamson, 1987.
"Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 102(1), pages 135-145.
- Stephen D. Williamson, 1984. "Costly Monitoring, Loan Contracts and Equilibrium Credit Rationing," Working Papers 572, Queen's University, Department of Economics.
- Paul M. Ong, 2002. "Car ownership and welfare-to-work," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 21(2), pages 239-252.
- Dwight M. Jaffee & Thomas Russell, 1984. "Imperfect Information, Uncertainty, and Credit Rationing: A Reply," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 869-872.
- Chakravarty, Sugato & Scott, James S, 1999. "Relationships and Rationing in Consumer Loans," The Journal of Business, University of Chicago Press, vol. 72(4), pages 523-544, October.
- Loretta J. Mester, 1997. "What's the point of credit scoring?," Business Review, Federal Reserve Bank of Philadelphia, issue Sep, pages 3-16.
- Leonard I. Nakamura, 1993. "Recent research in commercial banking: information and lending," Working Papers 93-24, Federal Reserve Bank of Philadelphia.
- Paul Ong & Evelyn Blumenberg, 1998. "Job Access, Commute and Travel Burden among Welfare Recipients," Urban Studies, Urban Studies Journal Limited, vol. 35(1), pages 77-93, January.
- Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
When requesting a correction, please mention this item's handle: RePEc:mdl:mdlpap:0244r. 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: (Vijaya Wunnava)
If references are entirely missing, you can add them using this form.