Price Regulation, Adverse Selection, and Imperfect Competition in Credit Markets

, Economics PhD student

Loan price regulation is a common policy in credit markets and usually takes the form of interest rate caps. Supporters argue they protect borrowers from high interest rates and overindebtness, while opponents argue they harm credit access for borrowers. I study the implications of such regulation on pricing, risk selection and consumer welfare using a conceptual framework featuring adverse selection and imperfect competition. I exploit a relevant change in price regulation in the Chilean credit market as an empirical application. Using marketwide contract-level data, we provide evidence in line with predictions of the model: stronger price regulation decreases loan interest rates, reduces quantities transacted and improves default risk of the borrower pool. In ongoing work, I am estimating the model to assess welfare implications and study counterfactual regulation designs. In future work, welfare calculations will be supplemented using survey data on information frictions and behavioral biases, to disentangle choice and consumption utility.