Work

The Cost of Consumer Collateral: Evidence From Bunching

Year: 2025

Type: article

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.

Source: Econometrica

DOI: 10.3982/ecta22303

Authors: Benjamin L. Collier, Cameron M. Ellis, Benjamin J. Keys

Institutions: Temple University, University of Iowa, National Bureau of Economic Research, University of Pennsylvania

Language: English

Topic: Housing Market and Economics

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $5,290

Funder: Wharton School, University of Pennsylvania