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Observing Unobservables: Identifying Information Asymmetries With a Consumer Credit Field Experiment

• Tags:
• selection,
• credit,
• hazard,
• moral hazard

Overview Information asymmetries are important in theory but difficult to identify in practice. The empirical importance of adverse selection and moral hazard is estimated in a consumer credit market using a new field experiment methodology. Evidence is found of both adverse selection (among women) and moral hazard (predominantly among men), and the findings suggest that about 20% of default is due to asymmetric information problems. This helps explain the prevalence of credit constraints even in a market that specializes in financing high-risk borrowers at very high rates.

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