Adverse Selection on Maturity: Evidence from On-Line Consumer Credit

Andrew Hertzberg, Andres Liberman, Daniel Paravisini
2015 Social Science Research Network  
Longer loan maturity provides borrowers with insurance against future changes in the price of credit. The present paper examines whether, consistent with theories of insurance markets with private information, maturity choice leads to adverse selection. Our estimation compares two groups of observationally equivalent borrowers that took identical unsecured 36-month loans, only one of which had also a 60-month maturity choice available. We find that when long maturity is available, fewer
more » ... able, fewer borrowers take the short-term loan, and those that do, default less. Additional findings suggest borrowers self-select on private information about their future ability to repay. The findings imply that maturity can be used to screen borrowers on this private information. Miller, 2005, Debt maturity, risk, and asymmetric information, The Journal of Finance 60, 2895-2923. , 2011, Why do borrowers pledge collateral? new empirical evidence on the role of asymmetric information, Journal of Financial Intermediation 20, 55-70.
doi:10.2139/ssrn.2629383 fatcat:k4y2eob2indltpxon74nr4ua2y