Liquidity Constraints and Imperfect Information in Subprime Lending

We present new evidence on consumer liquidity constraints and the credit market conditions that might give rise to them. Our analysis is based on unique data from a large auto sales company that serves the subprime market. We first document the role of short-term liquidity in driving purchasing behavior, including sharp increases in demand during tax rebate season and a high sensitivity to minimum down payment requirements. We then explore the informational problems facing subprime lenders. We find that default rates rise significantly with loan size, providing a rationale for lenders to impose loan caps because of moral hazard. We also find that borrowers at the highest risk of default demand the largest loans, but the degree of adverse selection is mitigated substantially by effective risk-based pricing.

Research Note: Beasts and Babies: Styles of Stereotyping

This research note presents a very brief summary of the argument we are developing for a much longer and more detailed journal article. Our aim here is to present the basic hypotheses that: 1) two main styles of stereotyping are used to either dehumanize or infantilize a target group, and 2) the selection of a style of stereotyping depends upon the extent to which the target group is perceived as a threat