Measuring the welfare cost of asymmetric information in consumer credit markets

Information asymmetries are known in theory to lead to inefficiently low credit provision, yet empirical estimates of the resulting welfare losses are scarce. This paper leverages a randomized experiment conducted by a large fintech lender to estimate welfare losses arising from asymmetric informati...

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Bibliographic Details
Published in:Journal of financial economics 2022-12, Vol.146 (3), p.821-840
Main Authors: DeFusco, Anthony A., Tang, Huan, Yannelis, Constantine
Format: Article
Language:English
Subjects:
Asymmetric information
Consumer credit
Experiment
Fintech
Welfare
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Summary:Information asymmetries are known in theory to lead to inefficiently low credit provision, yet empirical estimates of the resulting welfare losses are scarce. This paper leverages a randomized experiment conducted by a large fintech lender to estimate welfare losses arising from asymmetric information in the market for online consumer credit. Building on methods from the insurance literature, we show how exogenous variation in interest rates can be used to estimate borrower demand and lender cost curves and recover implied welfare losses. While asymmetric information generates large equilibrium price distortions, we find only small overall welfare losses, particularly for high-credit-score borrowers.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2022.09.001