Paper

Elasticities of Demand for Consumer Credit

Consumers' borrowing behavior when interest rates and/or loan maturity are exogenously changed
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This paper estimates elasticities of demand for consumer credit, with respect to price and maturity, using randomized trials implemented by a consumer lender. The experiment identifies that:

  • Demand curves with respect to price are downward sloping, but flatter throughout most of the price range;
  • Demand becomes highly price sensitive at higher-than-normal rates.

The paper discusses several interpretations of this behavior like:

  • Selection (samples include prior borrowers with particular discount rates);
  • Competition and contemporaneous substitution (raising rates drive borrowers to other lenders);
  • Intertemporal substitution (borrowers simply wait for the lender's rates to drop);
  • Behavioral explanations (fairness or loss aversion).

The paper concludes that:

  • Loan size is an order of magnitude more responsive to changes in loan maturity than to changes in interest rate;
  • Both elasticities vary with income in ways that are consistent with the (relatively) poor facing relatively severe liquidity constraints;
  • Price elasticities appear to increase with income and maturity elasticities decrease with income;
  • This pattern indicates the presence of binding liquidity constraints for the poor.