Title: Measuring the Welfare Effects of Adverse Selection in Consumer Credit Markets
Abstract: Information asymmetries are known in theory to lead to inefficiently low credit provision, yet empirical estimates of the resulting welfare losses are scarce. This paper leverages a randomized experiment conducted by a large fintech lender to estimate welfare losses arising from asymmetric information in the market for online consumer credit. Building on methods from the insurance literature, we show how exogenous variation in interest rates can be used to estimate borrower demand and lender cost curves and recover implied welfare losses. While asymmetric information generates large equilibrium price distortions, we find only small overall welfare losses, particularly for high-credit-score borrowers.
About This Series: The Robert A. Hedges Research Seminar Series is hosted by the Department of Risk, Insurance, and Healthcare Management in the Fox School of Business. The seminar series comprises invited lectures from academics experts around the world who present research in insurance, risk management, and actuarial science