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Real Effects of Search Frictions in Consumer Credit Markets

Author

Listed:
  • Bronson Argyle
  • Taylor D. Nadauld
  • Christopher Palmer

Abstract

We establish two underappreciated facts about costly search. First, unless demand is perfectly inelastic, search frictions can result in significant deadweight loss by decreasing consumption. Second, whenever cross-price elasticities are non-zero, costly search in one market also affects quantities in other markets. As predicted by our model of search for credit under elastic demand, we show that search frictions in credit markets contribute to price dispersion, affect loan sizes, and decrease final-goods consumption. Using microdata from millions of auto-loan applications and originations not intermediated by car dealers, we isolate plausibly exogenous variation in interest rates due to institution-specific pricing rules that price risk with step functions. These within-lender discontinuities lead to substantial variation in the benefits of search across lenders and distort extensive- and intensive-margin loan and car choices differentially in high- versus low-search-cost areas. Our results demonstrate real effects of the costliness of shopping for credit and the continued importance of local bank branches for borrower outcomes even in the mobile-banking era. More broadly, we conclude that costly search affects consumption in both primary and complementary markets.

Suggested Citation

  • Bronson Argyle & Taylor D. Nadauld & Christopher Palmer, 2020. "Real Effects of Search Frictions in Consumer Credit Markets," NBER Working Papers 26645, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26645
    Note: CF IO PE
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    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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