Citation

Discussion Paper Details

Please find the details for DP6182 in an easy to copy and paste format below:

Full Details

Title: Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Experiment

Author(s): Dean S. Karlan and Jonathan Zinman

Publication Date: March 2007

Keyword(s): adverse selection, credit markets, development finance, field experiment, Information asymmetries, microfinance and moral hazard

Programme Area(s): Development Economics

Abstract: Information asymmetries are important in theory but difficult to identify in practice. We estimate the presence and importance of adverse selection and moral hazard in a consumer credit market using a new field experiment methodology. We randomized 58,000 direct mail offers issued by a major South African lender along three dimensions: 1) an initial "offer interest rate" featured on a direct mail solicitation; 2) a "contract interest rate" that was revealed only after a borrower agreed to the initial offer rate; and 3) a dynamic repayment incentive that extended preferential pricing on future loans to borrowers who remained in good standing. These three randomizations, combined with complete knowledge of the Lender's information set, permit identification of specific types of private information problems. Our setup distinguishes adverse selection from moral hazard effects on repayment, and thereby generates unique evidence on the existence and magnitudes of specific credit market frictions. We find evidence of moral hazard and weaker evidence for adverse selection. A rough calibration suggests that perhaps 7% to 16% of default is due to asymmetric information problems. Asymmetric information may help explain the prevalence of credit constraints even in a market that specializes in financing high-risk borrowers at very high rates.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6182

Bibliographic Reference

Karlan, D and Zinman, J. 2007. 'Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Experiment'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6182