The Extension of Credit with Nonexclusive Contracts and Sequential Banking Externalities
American Economic Journal: Economic Policy
vol. 15,
no. 1, February 2023
(pp. 233-71)
Abstract
Nonexclusive sequential borrowing can increase default and impose externalities on prior lenders. We document that sequential banking is pervasive with substantial effects. Using credit card applications from a large bank and data on the applicants' entire loan portfolios, we find that an additional credit line causes a 5.9 percentage point decline in default for high-score borrowers on previous loans. However, for low-score borrowers, it causes a 19 percentage point increase. The former use the new credit to smooth payments on preexisting loans, while the latter increase their total debt. These results have implications for "no-universal-default" regulation and financial inclusion.Citation
De Giorgi, Giacomo, Andres Drenik, and Enrique Seira. 2023. "The Extension of Credit with Nonexclusive Contracts and Sequential Banking Externalities." American Economic Journal: Economic Policy, 15 (1): 233-71. DOI: 10.1257/pol.20200220Additional Materials
JEL Classification
- D62 Externalities
- D82 Asymmetric and Private Information; Mechanism Design
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
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