The Cost of Consumer Collateral: Evidence From Bunching

How do collateral requirements impact consumer borrowing behavior? 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. Our bunching estimates suggest that the median borrower is willing to give up 40% of their loan amount to avoid posting collateral. Exploiting time variation in the threshold, we estimate collateral causally reduces default rates by 36%. Finally, we structurally estimate households' attachment to their homes, net of any equity, and find a median value of $11,000. Attachment creates a wedge between lender and borrower valuation of collateral of 15%. Our results explain high perceived default costs in the mortgage market, and document the importance of collateral for reducing moral hazard in consumer credit markets.

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Publication Details

Journal
Econometrica
Published
2025-01-01
DOI
https://doi.org/10.3982/ecta22303
Citations
3
Primary Topic
Market Dynamics and Volatility
Type
article
Field-Weighted Citation Impact
9.39

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article

The Cost of Consumer Collateral: Evidence From Bunching

Benjamin J. Keys, Benjamin Collier, Cameron Ellis
3 citations
Econometrica
Market Dynamics and Volatility
9.39
article

The Cost of Consumer Collateral: Evidence From Bunching

Benjamin J. Keys, Benjamin Collier, Cameron Ellis
article en
3 citations

Abstract

How do collateral requirements impact consumer borrowing behavior? 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. Our bunching estimates suggest that the median borrower is willing to give up 40% of their loan amount to avoid posting collateral. Exploiting time variation in the threshold, we estimate collateral causally reduces default rates by 36%. Finally, we structurally estimate households' attachment to their homes, net of any equity, and find a median value of $11,000. Attachment creates a wedge between lender and borrower valuation of collateral of 15%. Our results explain high perceived default costs in the mortgage market, and document the importance of collateral for reducing moral hazard in consumer credit markets.

EconometricaVol. 93(3)
University of Iowa (US), University of Pennsylvania (US), Temple University (US)
Wharton School, University of Pennsylvania
Openalex Percentile: Top 3%
Market Dynamics and Volatility
9.39
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The Cost of Consumer Collateral: Evidence From Bunching — Benjamin J. Keys, Benjamin Collier, et al. · Econometrica (2025) | TGRS Research Map | TGRS