The Cost of Consumer Collateral: Evidence From Bunching
Benjamin L. Collier, Cameron M. Ellis, Benjamin J. Keys
Econometrica · 2025 · Volume 93 · Issue 3
Abstract
How do collateral requirements impact consumer borrowing behavior? Using administrative loan application and performance data from the U.S. Federal Disaster Loan Program, we exploit a loan amount threshold above which households must post their residence as collateral. Our bunching estimates suggest that the median borrower is willing to give up 40% of their loan amount to avoid posting collateral. Exploiting time variation in the threshold, we estimate collateral causally reduces default rates by 36%. Finally, we structurally estimate households' attachment to their homes, net of any equity, and find a median value of $11,000. Attachment creates a wedge between lender and borrower valuation of collateral of 15%. Our results explain high perceived default costs in the mortgage market, and document the importance of collateral for reducing moral hazard in consumer credit markets.
Keywords
Collateral, asymmetric information, moral hazard, collateral aversion, consumer finance, housing
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