The Credit-Constrained Consumer: An Empirical Study of Demand and Supply in the Loan Market

This article presents an empirical analysis of credit-constrained households in which models of both demand and supply sides of the market for loans are simultaneously estimated. We develop a discrete-choice logit model of the consumers' decision on whether or not to apply for credit. Combining this with a reduced-form logistic model for the banks' credit-granting decision, we then estimate the model with cross-sectional data, as a nonlinear, ordered, sequential logit. Our findings shed light on the criteria used by banks in assessing credit applications and reveal the strong dependence of preferences on demographic characteristics. The results also suggest that agents face significant fixed costs in applying for loans. The fact that we jointly estimate models of both supply and demand sides of the credit market enables us to examine whether particular groups in the population are more frequently credit rationed because they tend to demand more loans or because they are viewed as bad credit risks by lenders.