Search and Negotiation with Biased Beliefs in Consumer Credit Markets

Abstract

How do inaccurate beliefs about the distribution of interest rates affect search and outcomes in consumer credit markets? In collaboration with Chile’s financial regulator, we conducted a randomized controlled trial with 112,063 loan seekers where we showed treated participants a price comparison tool that we built using administrative data on the universe of consumer loans merged with borrower characteristics. The tool shows loan seekers a conditional distribution of interest rates based on similar loans obtained recently by similar borrowers. 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 be 39% more likely to negotiate with their lender, to receive 13% more offers and 11% lower interest rates, and to be 5% more likely to take out a loan. We also cross-randomized whether we asked participants their beliefs about the distribution of interest rates, and find that merely asking these questions led them to search at 4% more institutions and obtain 10% lower interest rates. Joint paper with Erik Berwart, Sheisha Kulkarni, and Santiago Truffa.