Liquidity Constraints and Imperfect Information in Subprime Lending
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- 1 February 2009
- journal article
- Published by American Economic Association in American Economic Review
- Vol. 99 (1) , 49-84
- https://doi.org/10.1257/aer.99.1.49
Abstract
We present new evidence on consumer liquidity constraints and the credit market conditions that might give rise to them. We analyze unique data from a large auto sales company serving the subprime market. Short-term liquidity appears to be a key driver of consumer behavior. Demand increases sharply during tax rebate season and purchases are highly sensitive to down-payment requirements. Lenders also face substantial informational problems. Default rates rise significantly with loan size, providing a rationale for loan caps, and higher-risk borrowers demand larger loans. This adverse selection is mitigated, however, by risk-based pricing. (JEL D14, D82, D83, G21)Keywords
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