DP9210 Subprime Consumer Credit Demand: Evidence from a Lender's Pricing Experiment

Author(s): Sule Alan, Gyöngyi Lóránth
Publication Date: November 2012
Keyword(s): subprime credit; randomized trials; liquidity constraints
JEL(s): D11, D12, D14
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9210

Using a unique panel data set from a UK credit card company, we analyze the interest rate sensitivity of subprime credit card borrowers. In addition to all individual transactions and loan terms, we also have access to details of a randomized interest rate experiment conducted by the lender on the existing (inframarginal) loans. Access to such information by academic researchers is rare. The data and the experimental design provide us with a clean identification of heterogenous interest rate sensitivities across borrower types within the subprime population. We find that subprime credit card borrowers generally do not reduce their demand for credit when subject to increases in interest rates. However, we estimate a number of interesting responses that suggest that subprime borrowers are not a homogenous group. The paper also contributes to the literature by demonstrating the importance of isolating exogenous variation in interest rates. We show that estimating a standard credit demand equation with the non-experimental variation in the data leads to severely biased estimates. This is true even when conditioning on a rich set of controls and individual fixed effects.