Econometrica Vol. 93 No. 3 2025
The Cost of Consumer Collateral: Evidence From Bunching
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.
- DOI
- 10.3982/ecta22303
- Volume
- 93
- Issue
- 3
- Pages
- 779-819
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref