Competition and Selection in Credit Markets

95 Pages Posted: 24 Aug 2021

See all articles by Constantine Yannelis

Constantine Yannelis

University of Chicago, Booth School of Business, Finance, Students

Anthony Lee Zhang

University of Chicago - Booth School of Business

Date Written: August 23, 2021

Abstract

We present both theory and evidence that increased competition may decrease rather than increase consumer welfare in subprime credit markets. We present a model of lending markets with imperfect competition, adverse selection and costly lender screening. In more competitive markets, lenders have lower market shares, and thus lower incentives to monitor borrowers. Thus, when markets are competitive, all lenders face a riskier pool of borrowers, which can lead interest rates to be higher, and consumer welfare to be lower. We provide evidence for the model’s predictions in the auto loan market using administrative credit panel data.

JEL Classification: D14,D4,G20,G21,G5,L62

Suggested Citation

Yannelis, Constantine and Zhang, Anthony Lee, Competition and Selection in Credit Markets (August 23, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-99, Available at SSRN: https://ssrn.com/abstract=3909941 or http://dx.doi.org/10.2139/ssrn.3909941

Constantine Yannelis (Contact Author)

University of Chicago, Booth School of Business, Finance, Students ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Anthony Lee Zhang

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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