Review of Financial Studies Vol. 24 No. 2 2011
Fuzzy Math, Disclosure Regulation, and Market Outcomes: Evidence from Truth-in-Lending Reform
Abstract
[We posit that consumer lenders shroud interest rates and market "low monthly payments" to price discriminate on "fuzzy math" or "payment/interest bias": consumers' pervasive tendency to underestimate borrowing costs when an interest rate is not disclosed. We test whether mandated disclosure changes lenders' ability to price discriminate using withinhousehold interactions between payment/interest bias and policy-induced variation in the strength of Truth-in-Lending Act (TILA) enforcement across lenders and time. Weak TILA enforcement substantially widens the gap between rates paid by more-biased and lessbiased borrowers. TILA compliance costs appear to increase interest rates overall, making the net effect on interest rates ambiguous.]
- Volume
- 24
- Issue
- 2
- Pages
- 506-534
- Sources
- bibtex:phds-export.bib