1. Searching with Inaccurate Priors in Consumer Credit Markets
- Author
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Berwart, Erik, Higgins, Sean, Kulkarni, Sheisha, and Truffa, Santiago
- Subjects
credit ,interest rates ,lending ,financial literacy ,financial planning - Abstract
How do inaccurate priors about the distribution of interest rates affect search and outcomes in consumer credit markets? Consumer credit markets feature large amounts of within-borrower price dispersion in interest rates; if consumers are unaware of the extent of this price dispersion, they may shop less and take out loans at higher interest rates than they would otherwise. We conducted a randomized controlled trial with 112,063 loan seekers in Chile where we showed treated participants a price comparison tool that we built using administrative data from Chile’s financial regulator. The tool shows loan seekers a conditional distribution of interest rates based on similar loans obtained recently by similar borrowers, using data on the universe of consumer loans merged with borrower characteristics. We also cross-randomized whether we asked participants their priors about the distribution of interest rates. We find that consumers thought interest rates were lower than they actually were, and the price comparison tool caused them to increase their expectations about the interest rate they would obtain by 56%. Consumers also underestimated price dispersion, and our price comparison tool caused them to increase their estimates of dispersion by 69%. The price comparison tool did not cause people to search or apply at more institutions, but it did cause them to receive 13% more offers and 11% lower interest rates, and to be 28% more likely to negotiate with their lender and 4.7% more likely to take out a loan. In contrast, merely asking participants their expectations about interest rates led them to search at 4% more institutions and obtain 9% lower interest rates.
- Published
- 2024