Measuring the Welfare Cost of Asymmetric Information in Consumer Credit Markets

Last registered on September 03, 2021

Pre-Trial

Trial Information

General Information

Title
Measuring the Welfare Cost of Asymmetric Information in Consumer Credit Markets
RCT ID
AEARCTR-0008183
Initial registration date
September 03, 2021
Last updated
September 03, 2021, 6:32 PM EDT

Locations

Region

Primary Investigator

Affiliation
Northwestern University

Other Primary Investigator(s)

PI Affiliation
London School of Economics
PI Affiliation
University of Chicago

Additional Trial Information

Status
Completed
Start date
2018-01-01
End date
2018-03-31
Secondary IDs
Prior work
This trial is based on or builds upon one or more prior RCTs.
Abstract
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.
External Link(s)

Registration Citation

Citation
DeFusco, Anthony, Huan Tang and Constantine Yannelis. 2021. "Measuring the Welfare Cost of Asymmetric Information in Consumer Credit Markets." AEA RCT Registry. September 03. https://doi.org/10.1257/rct.8183-1.0
Experimental Details

Interventions

Intervention(s)
The experiment we analyze was designed independently by our data provider to examine loan applicants’ sensitivity to borrowing costs and was implemented from January to March, 2018. The platform randomly selected 11,180 potential borrowers into the experiment who had successfully applied and qualified for credit during this window. Selected applicants were then randomly divided into two equal-sized groups: one control group and one treatment group. Applicants in the control group were offered standard financing terms, while the treatment group received a 40 percent reduction in their overall cost of borrowing. Data was then collected for each of these loan applicants on whether they took up the loan and their subsequent repayment behavior.
Intervention Start Date
2018-01-01
Intervention End Date
2018-03-31

Primary Outcomes

Primary Outcomes (end points)
Take up: An indicator for whether the loan application took up the loan
Charge-offs: The fraction of promised loan payments never received by the lender.
Primary Outcomes (explanation)

Secondary Outcomes

Secondary Outcomes (end points)
Secondary Outcomes (explanation)

Experimental Design

Experimental Design
The platform randomly selected 11,180 potential borrowers into the experiment who had successfully applied and qualified for credit during this window. Selected applicants were then randomly divided into two equal-sized groups: one control group and one treatment group. Applicants in the control group were offered standard financing terms, while the treatment group received a 40 percent reduction in their overall cost of borrowing. Data was then collected for each of these loan applicants on whether they took up the loan and their subsequent repayment behavior.
Experimental Design Details
Randomization Method
Randomization done electronically by the lender.
Randomization Unit
Randomization was at the loan-applicant level.
Was the treatment clustered?
No

Experiment Characteristics

Sample size: planned number of clusters
11,180 loan applicants
Sample size: planned number of observations
11,180 loan applicants
Sample size (or number of clusters) by treatment arms
5590 loan applicants
Minimum detectable effect size for main outcomes (accounting for sample design and clustering)
IRB

Institutional Review Boards (IRBs)

IRB Name
IRB Approval Date
IRB Approval Number

Post-Trial

Post Trial Information

Study Withdrawal

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Intervention

Is the intervention completed?
No
Data Collection Complete
Data Publication

Data Publication

Is public data available?
No

Program Files

Program Files
Reports, Papers & Other Materials

Relevant Paper(s)

Reports & Other Materials