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Cited by 503

The DOI matches its Crossref record; 48 of the 48 references it cites were found in a registry or an index.

Observing Unobservables: Identifying Information Asymmetries With a Consumer Credit Field Experiment

Open access
·2009·Econometrica
DOI 10.3982/ecta5781
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Abstract

Information asymmetries are important in theory but difficult to identify in practice. We estimate the presence and importance of hidden information and hidden action problems in a consumer credit market using a new field experiment methodology. We randomized 58,000 direct mail offers to former clients of a major South African lender along three dimensions: (i) an initial “offer interest rate” featured on a direct mail solicitation; (ii) a “contract interest rate” that was revealed only after a borrower agreed to the initial offer rate; and (ii) a dynamic repayment incentive that was also a surprise and 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 hidden information effects from selection on the offer rate (via unobservable risk and anticipated effort), from hidden action effects (via moral hazard in effort) induced by actual contract terms. We find strong evidence of moral hazard and weaker evidence of hidden information problems. A rough estimate suggests that perhaps 13% to 21% of default is due to moral hazard. Asymmetric information thus may help explain the prevalence of credit constraints even in a market that specializes in financing high-risk borrowers.

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Metadata

Venue
Econometrica
Publisher
The Econometric Society
Published
2009
Volume
77
Issue
6
Pages
1993-2008
ISSN
0012-9682 (ISSN-L)
DOI
10.3982/ecta5781
OpenAlex
W3121325984
Cited by
503
References
48
FWCI
85.65
Type
journal article
Language
en
Open access
bronze

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