The Cost of Consumer Collateral: Evidence from Bunching

Benjamin Collier; Cameron Ellis; Benjamin J. Keys

doi:10.3386/w29527

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The Cost of Consumer Collateral: Evidence from Bunching

Working paper

Open access

The Cost of Consumer Collateral: Evidence from Bunching

Benjamin Collier, Cameron Ellis and Benjamin J. Keys

NBER working paper series, Vol.29527

National Bureau of Economic Research

11/2021

DOI: 10.3386/w29527

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Abstract

We show that borrowers are highly sensitive to the requirement of posting their homes as collateral. Using administrative loan application and performance data from the U.S. Federal Disaster Loan Program, we exploit a loan amount threshold above which households must post their residence as collateral. One-third of all borrowers select the maximum uncollateralized loan amount, and our bunching estimates suggest that the median borrower is willing to give up 40% of their loan amount to avoid collateral. Exploiting time variation in the loan amount threshold, we find that collateral causally reduces default rates by 35%. Our results help to explain high perceived default costs in the mortgage market, and uniquely quantify the extent to which collateral reduces moral hazard in consumer credit markets.

Business

Education

Collateral

Exploit

health care economics and organizations

Highly sensitive

Loan

Monetary economics

Moral hazard

Residence

Details

Title: Subtitle: The Cost of Consumer Collateral: Evidence from Bunching
Creators: Benjamin Collier
Cameron Ellis
Benjamin J. Keys
Resource Type: Working paper
Publication Details: NBER working paper series, Vol.29527
DOI: 10.3386/w29527
Publisher: National Bureau of Economic Research; Cambridge, Massachusetts
Number of pages: 57 pages
Language: English
Date posted: 11/2021
Academic Unit: Finance
Record Identifier: 9984536729002771

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