Informational frictions and the persistence of cross-subsidies in equilibrium

We study the role of informational frictions and biased consumer beliefs in sustaining market equilibria characterized by large, regressive cross-subsidies between different types of consumers. The context of this study is the Brazilian "consórcio" market, the largest formal instance of rotating finance associations ("savings groups"), representing about 20-30% of all yearly vehicle credit issued. A rotating finance group works as a closed-system of transfers where money is borrowed and lent across participants, and an allocation mechanism decides the ordering of who borrows first. Ex-ante cross-subsidies emerge in the group when the ordering is not fully randomized and those who borrow last are not compensated for their late position in the queue. Because the order of borrowing is partly random, there is uncertainty over credit issuance dates, and beliefs about when credit will be issued is central to determine the expected cost of financing through consórcios. We document the market dynamics leveraging administrative data from the Central Bank covering the universe of 60 million consórcio contracts across 75,000 groups that begun since 2010. As part of this trial, we recruit consumers online and conduct a survey with a "field" component where we: (i) elicit their beliefs about the probabilities of the timing of credit in this product; (ii) randomize a debiasing information intervention; (iii) measure willingness-to-pay for an alternative product with less cross-subsidization, where a larger share of credit is distributed through lotteries. We complement consumers' surveys by collecting survey responses from consórcio brokers, who are financial agents specialized in selling consórcios through banks, car dealerships, and specialized administrator firms.