Searching for Approval
Sumit Agarwal, John Grigsby, Ali Hortaçsu, Gregor Matvos, Amit Seru, Vincent Yao
We study the interaction of search and application approval in credit markets. We combine a unique dataset, which details search behavior for a large sample of mortgage borrowers, with loan application and rejection decisions. Our data reveal substantial dispersion in mortgage rates and search intensity, conditional on observables. However, in contrast to predictions of standard search models, we find a novel non-monotonic relationship between search and realized prices: borrowers, who search a lot, obtain more expensive mortgages than borrowers' with less frequent search. The evidence suggests that this occurs because lenders screen borrowers' creditworthiness, rejecting unworthy borrowers, which differentiates consumer credit markets from other search markets. Based on these insights, we build a model that combines search and screening in presence of asymmetric information. Risky borrowers internalize the probability that their application is rejected, and behave as if they had higher search costs. The model rationalizes the relationship between search, interest rates, defaults, and application rejections, and highlights the tight link between credit standards and pricing. We estimate the parameters of the model and study several counterfactuals. The model suggests that "overpayment" may be a poor proxy for consumer unsophistication since it partly represents rational search in presence of rejections. Moreover, the development of improved screening technologies from AI and big data (i.e., fintech lending) could endogenously lead to more severe adverse selection in credit markets. Finally, place based policies, such as the Community Reinvestment Act, may affect equilibrium prices through endogenous search responses rather than increased credit risk
Year of publication: |
June 2020
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Authors: | Agarwal, Sumit |
Other Persons: | Grigsby, John (contributor) ; Hortaçsu, Ali (contributor) ; Matvos, Gregor (contributor) ; Seru, Amit (contributor) ; Yao, Vincent (contributor) |
Institutions: | National Bureau of Economic Research (contributor) |
Publisher: |
2020: Cambridge, Mass : National Bureau of Economic Research |
Subject: | Suchtheorie | Search theory | Konsumentenverhalten | Consumer behaviour | Asymmetrische Information | Asymmetric information | Hypothek | Mortgage | Bewertung | Evaluation | Kreditwürdigkeit | Credit rating |
Saved in:
freely available
Extent: | 1 Online-Ressource illustrations (black and white) |
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Series: | NBER working paper series ; no. w27341 |
Type of publication: | Book / Working Paper |
Language: | English |
Notes: | System requirements: Adobe [Acrobat] Reader required for PDF files Mode of access: World Wide Web Hardcopy version available to institutional subscribers |
Other identifiers: | 10.3386/w27341 [DOI] |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10012481535