Real Effects of Search Frictions in Consumer Credit Markets.

This article investigates how search frictions in consumer credit markets, specifically in automobile-secured loans, influence accepted interest rates, loan sizes, and durable goods consumption. Using a large administrative dataset of 2.4 million used-car loans from 326 U.S. lenders, the authors exploit lender-specific discontinuities in interest-rate pricing based on FICO credit score thresholds to identify quasi-random variation in loan offers. They find that borrowers facing higher search costs—proxied by fewer nearby lending institutions—are more likely to accept higher interest-rate markups, resulting in smaller loans and the purchase of older, less expensive cars compared to borrowers with lower search costs. The study rules out selection bias and adverse selection explanations by demonstrating balance in borrower characteristics and ex post loan performance across pricing discontinuities. Overall, the findings highlight that costly search for credit distorts both financing terms and consumption decisions, implying real welfare consequences beyond mere price dispersion in credit markets.