Adverse Selection on Maturity: Evidence from Online Consumer Credit

Category: Finance Seminar
When: 11 Oktober 2016
, 16:15
 - 17:30

Longer loan maturity provides borrowers with insurance against future changes in the price of
credit. The present paper examines whether, consistent with theories of insurance markets with
private information, maturity choice leads to adverse selection. Our estimation compares two
groups of observationally equivalent borrowers that took identical unsecured 36-month loans,
only one of which had also a 60-month maturity choice available. We find that when long
maturity is available, fewer borrowers take the short-term loan, and those that do, default less.
Additional findings suggest borrowers self-select on private information about their future ability
to repay. The findings imply that maturity can be used to screen borrowers on this private