The Economic and Financial Effects of Consumer Finance

• Applicant: Privatdozent Dr. Jan Keil, Ph.D.
• Subject Area: Economic Policy, Applied Economics ; Accounting and Finance
• Term: since 2020
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 452926309

Economists argue that many financial crises are associated with increases in household leverage, which are largely driven by the supply of credit. However, evidence on causal effects of credit supply shocks on consumer behavior and on household bankruptcy risk is scarce. It is unclear how consumers respond to improved access to finance, which consumer decisions are affected, and how general consumption patterns change. We have limited knowledge about how different groups of consumers respond differently and how effects of different types of credit supply shocks compare. In our project, we will analyze these details in consumer finance that are relevant for financial conditions of households (also for consumer welfare, economic policy, consumer protection, and business management). Specifically, we want to explore if consumer credit changes consumption styles from cautious, frugal to lustful, easy-minded habits. We expect to find, for example, that customers spend more on non-essential luxury goods and relatively expensive items. This would be the first identified analysis to show this and prove novel negative effects of finance on financial resilience of households. We also believe we can not only show that low income consumers with a low repayment rate are likely to respond more to better access to consumer finance, but that other consumer characteristics are also differentially effected. For example, we expect to find greater effects on impulsive customers attracted by advertisements as opposed to strategic customers planning ahead and using price comparison websites. This would again suggest adverse effects on average borrower and loan quality never documented before.The concept of a positive supply shock to consumer finance can, furthermore, be reflected in higher loan approval likelihoods, larger volumes granted, lower interest rates, or longer maturities. In the proposed project, we will be able to conduct the very first analysis in which we are able to differentiate between these in the same setting. We will investigate the impact of each of these and compare statistical significance levels and economic magnitudes to assess their relative financial costs and economic benefits. For example, we believe it is likely that higher loan approval rates affect consumer behavior and long-term financial health of households more adversely than longer maturities. We will access granular micro data from a large German online retailer that provides consumer lending services. The data cover 10 million customer visits. We have detailed information on customer characteristics, shopping and payment behavior, and the retailer's lending decision function. We have three different identification strategies that we plan to use in three different settings: we analyze randomized controlled trials conducted by the retailer; we exploit temporary errors in the lending function for a DiD analysis; and we use cut-off rules in the lending function for a RDD.

• DFG Programme: Research Grants