“Adverse Selection on Maturity: Evidence from On-line Consumer Credit” by Daniel Paravisini
New York University
London School of Economics
We provide evidence that borrowers who select into long term debt are unobservably more exposed to shocks to their ability to repay. Our estimation compares two groups of observationally equivalent borrowers that took identical 36-month loans, but where only one of the groups is selected on maturity, in the sense that it chose the 36-month loan when a 60-month maturity option was also available. We find that borrowers who self-select into short maturity loans default less, have higher future credit ratings, and, conditional on good standing, prepay more. Our findings imply that loan maturity can be used to screen borrowers in consumer credit markets with asymmetric information.