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  3. American Economic Review
  4. March 2009
  5. Liquidity Constraints and Imperfect Information in Subprime Lending

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Liquidity Constraints and Imperfect Information in Subprime Lending

  • William Adams
  • Liran Einav
  • Jonathan Levin
American Economic Review
vol. 99, no. 1, March 2009
(pp. 49–84)
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Abstract

We present new evidence on consumer liquidity constraints and the credit market conditions that might give rise to them. We analyze unique data from a large auto sales company serving the subprime market. Short-term liquidity appears to be a key driver of consumer behavior. Demand increases sharply during tax rebate season and purchases are highly sensitive to down-payment requirements. Lenders also face substantial informational problems. Default rates rise significantly with loan size, providing a rationale for loan caps, and higher-risk borrowers demand larger loans. This adverse selection is mitigated, however, by risk-based pricing. (JEL D14, D82, D83, G21)

Citation

Adams, William, Liran Einav, and Jonathan Levin. 2009. "Liquidity Constraints and Imperfect Information in Subprime Lending." American Economic Review, 99 (1): 49–84. DOI: 10.1257/aer.99.1.49

Additional Materials

JEL Classification

  • D14 Personal Finance
  • D82 Asymmetric and Private Information
  • D83 Search; Learning; Information and Knowledge; Communication; Belief
  • G21 Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages