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.
Authors
- Benjamin J. Keys
- Benjamin Collier (ORCID: https://orcid.org/0000-0002-3266-1220)
- Cameron Ellis (ORCID: https://orcid.org/0000-0002-2794-6299)
Institutions
- University of Iowa (US)
- University of Pennsylvania (US)
- Temple University (US)
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
Funders
- Wharton School, University of Pennsylvania