Elasticities of Demand for Consumer Credit
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.