Consumer Credit Regulation and Lender Market Power, with Eric Young and Zach Bethune [Under review]
We investigate the welfare consequences of consumer credit regulation in a dynamic, heterogeneous-agent model with an explicit role for lenders' market power. We incorporate a decentralized financial market with search and incomplete information frictions in an off-the-shelf Eaton-Gersowitz model of consumer credit and default. Lenders post credit offers with commitment. Borrowers can send multiple applications, but some are informed and send their applications towards the best credit offer, while others are uninformed and apply randomly. Equilibrium features price dispersion—controlling for a borrower's default risk, there exists both high- and low-cost lending. Importantly, the distribution of loan prices and the extent of lenders' market power is disciplined by borrowers' outside options. We calibrate the model to match characteristics of the unsecured consumer credit market, including high-cost options such as payday loans. We use the calibrated model to evaluate interest rate caps. In a model with a competitive financial markets, caps can only harm borrower welfare. However, we find in our model with lender market power that interest rate caps can raise borrower welfare by reducing markups, but that requires households have some degree of financial illiteracy (lack of information about interest rates).
High-Cost Consumer Credit: Desperation, Temptation and Default (Job Market Paper, previously circulated as "A Quantitative Model of High-Cost Consumer Credit") [Under review]
I study the welfare consequences of regulations on high-cost consumer credit in the US, such as borrowing limits and interest rate caps. Borrowers may be willing to borrow at high interest rates during bad times (e.g., health shocks), but they may also face a temptation to consume in the present more than is desirable in the long run, and thus overborrow. The pricing of credit by lenders can either exacerbate overborrowing or limit it, which affects the efficacy and optimality of regulations. I estimate an incomplete-markets, heterogeneous-agents model that features households with self-control and temptation and risk-based pricing of loans. I find that one-third of high-cost borrowers suffer from temptation but that regulatory borrowing limits and interest-rate caps reduce the welfare of these households. The latter is a consequence of tight price schedules of loans already limiting the borrowing capacity of temptation households.
Payday Lending: Evidence and Theory
Firstly, I document in a nationally representative survey that households that take out payday loans have: low-wealth and low-liquidity levels; relatively low income, although there are payday borrowers across the income distribution; high demand and rejection rates for traditional credit sources; and are more likely to experience expenditure shocks or unemployment spells. Secondly, I develop a model of banking and payday lending that delivers, in equilibrium, an interest rate and loan size spread between these lenders consistent with the data.
Informal Labor Markets and Consumer Credit, with Rodrigo Lluberas and Serafn Frache
Signaling and Temptation, with Xuan Tam and Eric Young
Coholding and the Open Banking Debate, with Yuchi Yao
Prices and Competition: Evidence from a Social Program (2021), with Fernando Borraz, Pablo Blanchard, and Emilio Aguirre. International Review of Applied Economics
Variance Decomposition of Prices in an Emerging Economy (2017), with Fernando Borraz. Monetaria
Paper or Plastic? Payment Instrument Choice in Uruguay (2015), with Rodrigo Lluberas. Revista Economia