Anthony DeFusco, Northwestern University

Measuring the Welfare Effects of Adverse Selection in Consumer Credit Markets

Abstract

Adverse selection is known in theory to lead to inefficiently low credit provision, yet empirical estimates of the resulting welfare losses are scarce. This paper leverages a randomized experiment conducted by a large Fintech lender to estimate the welfare losses arising from selection in the market for online consumer installment loans. We show how simple methods from the insurance literature can be adapted to the case of credit markets and apply those methods to estimate welfare losses in this market. While adverse selection leads to large equilibrium price distortions, we find only small overall welfare losses, particularly for high-credit-score borrowers.

Anthony DeFusco is an Associate Professor of Finance at the Kellogg School of Management at Northwestern University. He is an applied microeconomist who studies empirical questions in household finance with a particular emphasis on household behaviors and public policies affecting the housing and residential mortgage markets.

His recent work has studied the effects of regulations on household leverage in the mortgage market as well as the role of collateral constraints and interest rates in driving household borrowing behavior. In other work, he has also studied the role of short-term speculation and geographic spillovers in contributing to house price fluctuations.

Professor DeFusco joined the Kellogg School of Management in 2015 after receiving his Ph.D. in Applied Economics from the Wharton School at the University of Pennsylvania. He also holds a B.A. in Economics and Mathematics from Temple University