Publications
Removing the Fine Print: Standardized Products, Disclosure, and Consumer Outcomes
(with Gonzalo Iberti and Santiago Truffa)
JFE, Forthcoming
Prospective borrowers must study the fine print of loan contracts or risk surprises. To mitigate fine print, regulators have historically (a) improved disclosure or (b) standardized products. We use Chilean administrative data for a multi-stage natural experiment to separately identify the eects of disclosure and standardized products on borrower outcomes. We do this using Chile's unique dual-currency system, which generates exogenous variation around regulatory cutos. For financially sophisticated borrowers in our discontinuity sample disclosure reduces delinquencies by 13.7 percentage points or approximately 40%. We therefore use a difference-in-differences analysis to show that only standardized products benefit less sophisticated borrowers.
The Organizational Ecology of College Affordability: Research Activity, State Grant Aid Policies, and Student Debt at U.S. Public Universities (with C. Eaton, R. Birgeneau, H. Brady, and M. Hout)
Socius, 2019
Working Papers
Search and Negotiation with Biased Beliefs in Consumer Credit Markets
(with Erik Berwart, Sean Higgins, and Santiago Truffa)
Under Submission
How do inaccurate priors about the distribution of interest rates affect search and outcomes in consumer credit markets? Consumer credit markets feature large amounts of within-borrower price dispersion in interest rates; if consumers are unaware of the extent of this price dispersion, they may shop less and take out loans at higher interest rates than they would otherwise. We conducted a randomized controlled trial with 112,063 loan seekers in Chile where we randomized whether we showed participants a price comparison tool that we built using administrative data from Chile's financial regulator. The tool shows loan seekers a conditional distribution of interest rates based on similar loans obtained recently by similar borrowers, using data on the universe of consumer loans merged with borrower characteristics. We also cross-randomized whether we asked participants their priors about the distribution of interest rates. 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 receive 12% more offers, 11% lower interest rates, and to be 5% more likely to take out a loan. In contrast, merely asking participants their expectations about interest rates led them to search at 4% more institutions and obtain 9% lower interest rates.
NBER Summer Institute Presentation (20 min)
Bankruptcy as an Underutilized Tool: Stigma and Shame (with S. Ben-Ishai, Z. C. Irving, J. Montgomery, and A. Prabhakar)
Under Submission
Bankruptcy can provide a “fresh start” to consumers whose crushing debt leaves them unable to flourish economically or psychologically. Research shows the benefits of giving borrowers a clean slate: bankruptcy filing increases the probability of homeownership by 13.2 percentage points (Dobbie et al., 2017), increases annual earnings by $5,562, decreases five-year mortality by 1.2 percentage points, decreases five-year foreclosure rates by 19.1 percentage points (Dobbie and Song, 2015), and increases the probability of a debtor creating a new business (Parra, 2022). Debt reduction from interest payments (i.e., debt restructuring) decreased the probability of filing for bankruptcy by 33% and increased the probability of employment by 5.1% among other positive outcomes (Dobbie and Song, 2020). Despite these benefits, evidence suggests that fewer debtors file for bankruptcy than would benefit from doing so (Ben-Ishai and Schwartz, 2007; 2020; Gross et al., 2014). Our paper asks why so few debtors file for bankruptcy. Past research proposes that the bankruptcy system is under-utilized because it is expensive: insolvent Canadian debtors must pay between $1,800 to $6,500 in fees on top of a portion of their debts. Although we do not doubt that cost plays a role, our paper explores a second channel: stigma. Our paper explore this second channel in three parts. First, we develop a theoretical model that explains why stigma presents a barrier to bankruptcy filing. Specifically, we distinguish two forms of bankruptcy stigma––other-directed and self-directed––that plausibly limit filing in different ways. Second, we provide the first empirical evidence about the levels of self-stigma amongst debtors who are considering filing for bankruptcy. To do so, we develop a novel scale to measure bankruptcy self-stigma, adapted from research on self-stigma about depression. We then administered this scale to a population of 267 debtors who were actively considering bankruptcy, insofar as they responded to an advertisement for insolvency services. We find that bankruptcy carries stigma that is two orders of magnitude higher than depression, which is itself highly stigmatized. Finally, we consider the implications of stigma for policies that aim to increase participation in the bankruptcy system. We consider how interventions might directly reduce stigma by correcting misinformation about the moral character of insolvent debtors, the causes of bankruptcy, and the bankruptcy process. We also consider the implications of stigma for policies that seek to either increase or remove the human interactions within the bankruptcy system, including counselling and pro se bankruptcy.
Consumption, Savings, and Earnings Responses to Financial Windfalls
(with Rajashri Chakrabarti, Philippe d’Astous, Kory Kroft, Slava Mikhed, Matt Notowidigdo, Sahil Raina, and Barry Scholnick)
We estimate the causal effect of a financial windfall on (1) consumption (MPC) using credit report data on credit card and durables spending, (2) savings (MPS) using both tax data on financial assets and credit report data on debt repayments, and (3) labor earnings (MPE) using tax data. To do so, we merge data on 40,000 Canadian lottery winners to their income tax records and credit reports. We also flexibly estimate heterogeneity in the marginal propensities across income groups. Our findings reveal substantial heterogeneity in all three terms, with higher-income individuals having a larger MPE and MPS and lower-income individuals having a larger MPC. We develop a simple life-cycle model that allows individuals to vary in their earnings ability and rate of impatience, and show that our model can match our estimated heterogeneous responses if earnings ability and impatience are negatively correlated. Our results have implications for the design of multiple policy programs, including the design of fiscal stimulus programs, the introduction of a universal basic income program, and the optimal taxation of income and savings.
Estimating The Information Component in Switching Costs: A Structural Approach
(with Gonzalo Iberti and Santiago Truffa)
We exploit a unique natural experiment to structurally estimate the information frictions associated with switching costs. Specically, we study a Chilean policy that simplied and standardized the presentation of loan characteristics in contracts and quotes. Using administrative data from the banking regulator, we exploit how this policy change affected the price-sensitivity in consumer decisions to identify the reduction in information frictions. We then incorporate this estimate into a dynamic structural model to explore the link between reduced informational frictions and welfare in long-term market equilibrium. We find that after the policy information frictions fell around 10 percent, which translated into an interest reduction of 180 basis points. We estimate a welfare improvement for consumers of 15 percent in the long run.
Don’t Lend So Close to Me: Payday Lending Spillover Effects on Formal Credit (with Michael Boutros, Nuno Marques da Paixao, and Barry Scholnick)
Draft Available upon Request
We examine the impact of a hyper-local payday loan supply shock on debtor uses of formal credit, by matching debtor-level credit bureau data with location of individual payday lender entry and exit in a difference-in-differences setting. We find that payday lender entry into a neighborhood worsens the financial stress of borrowers who do not have the ability to borrow against housing, while only increasing credit card balances for those who do. However, we find that payday borrowing helps borrowers who are credit constrained, as their credit card balances under stress increase and credit scores drop significantly when a payday lender exits their neighbourhood. We also exploit exogenous variation in provincial regulation of payday lenders and find that 7 day cool-down periods between payday loans increase credit card stress, which persists for two years after payday lender entry. Regulations that restrict borrowers to one loan per lender increase their credit card balances under stress and damage their credit scores, though these effects are relatively short-lived. These results suggest that there are important heterogeneities in how payday borrowing interacts with formal credit products.
Works in Progress
The Debt Relief Project: Online and Low-Cost Access to Bankruptcy (with Stephanie Ben-Ishai, Zachary Irving, Jessica Montgomery, and Avantika Prabhakar)
Draft of Pilot Data Available Upon Request
By relieving individuals from crippling debt, bankruptcy has been shown to increase home ownership, annual earnings, employment, and entrepreneurship. In addition to improving filers’ future financial outcomes, bankruptcy may also improve psychological well-being by relieving financial stress. However, despite the benefits that insolvency offers, many debtors lack access to bankruptcy due to costs, technological barriers, and stigma. We conduct, to our knowledge, the first randomized controlled trial (RCT) to examine whether lowering the financial barriers to insolvency improves access to this important financial institution. In partnership with a licensed insolvency trustee (LIT) in Canada, we randomly subsidize potential filers with $1,000 toward bankruptcy or consumer proposal filing fees. A separate treatment arm will offer debtors a surprise subsidy after they have decided to file so that we can separately identify income effects from the economic effect of lowering the financial barrier to access bankruptcy. We also use moment-to-moment experience sampling and sub-clinical questionnaires to track participants’ stream of consciousness and mental health throughout the filing process to determine whether debt relief improves well-being by relieving financial stress.