INFORMATION COSTS AND THE ORGANIZATION OF CREDIT MARKETS: A THEORY OF INDIRECT LENDING

Michael E Staten, Otis W. Gilley, John Umbeck

Research output: Contribution to journalArticlepeer-review

9 Scopus citations

Abstract

This paper explains indirect lending as a strategy for reducing a bank's cost of screening borrowers. Commercial banks appear to “ration” credit by rejecting some direct loan applicants, although they accept higher‐risk borrowers who apply for loans indirectly through retailers. However, the more thorough credit check on direct loans causes applicants to sort themselves according to risk. Indirect applicants signal their higher risk through their choice of financing. Since banks gather more accurate information on direct applicants, the two types of contracts should differ in predictable ways. These implications are tested with Federal Reserve data on 5,000 automobile loans.

Original languageEnglish (US)
Pages (from-to)508-529
Number of pages22
JournalEconomic Inquiry
Volume28
Issue number3
DOIs
StatePublished - 1990
Externally publishedYes

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Economics and Econometrics

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