Description:

Sean Higgins (Northwestern University) -  The Impact of Price Comparison Tools in Consumer Credit Markets (with Erik Berwart, Sheisha Kulkarni, and Santiago Truffa)

Abstract: Consumer credit markets feature large amounts of price dispersion in loan costs, even conditional on loan and borrower characteristics. If consumers are unaware of the extent of this price dispersion, they may shop less and take out loans at higher interest rates than they would otherwise. We conduct a randomized controlled trial in Chile where we provide just-in-time, personalized information about the distribution of interest rates or the benefits of search to people searching for loans on Google. The first treatment arm is a price comparison tool that shows prospective borrowers a conditional distribution of interest rates based on administrative data on originated loans for borrowers and loans with similar observable characteristics. The second treatment is a simplified message that shows prospective borrowers an estimate of the monthly and total amount they could save by shopping at more banks. We find that consumers indeed underestimate price dispersion, and that the price comparison tool causes them to double their estimate of how much dispersion there is in interest rates. Consumers also underestimate the interest rate they will obtain, and the price comparison tool causes them to increase their prior about the interest rate they will obtain by 17 percentage points over a control mean of 23%. The simplified message treatment does not appear to affect priors about dispersion or the rate people expect to obtain. Our trial is still ongoing; after finishing our data collection, we will analyze results on loan characteristics using administrative data from Chile’s financial regulator. We will also conduct a follow-up phone survey that will be used to measure effects on search behavior and better understand how people form and update priors in consumer credit markets.