Bruno Ferman
Published: 2012
Total Pages: 126
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This dissertation consists of three essays. The first chapter studies whether credit demand is sensitive to interest rates, to the prominence of interest rate disclosure, and to nudges. Consumer credit regulations usually require that lenders disclose interest rates. However, lenders can evade the spirit of these regulations by concealing rates in the fine print and highlighting low monthly payments. I explore the importance of such evasion in Brazil, where consumer credit for lower and middle income borrowers is expanding rapidly, despite particularly high interest rates. By randomizing contract interest rates and the degree of interest rate disclosure, I show that most borrowers are highly rate-sensitive, whether or not interest rates are prominently disclosed in marketing materials. An exception is high-risk borrowers, for whom rate disclosure matters. These clients are rate-sensitive only when disclosure is prominent. I also show that borrowers who choose this type of financing are responsive to nudges that favor longer-term plans. Despite this evidence, the financial consequences of information disclosure, even for high-risk borrowers, are relatively modest, and clients are less susceptible to nudges when the stakes are higher. Together, these results suggest that consumers in Brazil are surprisingly adept at decoding information even when lenders try to obfuscate the interest rate information, suggesting a fair amount of sophistication in this population. The second chapter (co-authored with Leonardo Bursztyn, Florian Ederer, and Noam Yuchtman) studies the importance of peer effects in financial decisions. Using a field experiment conducted with a financial brokerage, we attempt to disentangle channels through which a person's financial decisions affect his peers'. When someone purchases an asset, his peers may also want to purchase it because they learn from his choice ("social learning") and because his possession of the asset directly affects others' utility of owning the same asset ("social utility"). We randomize whether one member of a peer pair who chose to purchase an asset has that choice implemented, thus randomizing possession of the asset. Then, we randomize whether the second member of the pair: 1) receives no information about his peer, or 2) is informed of his peer's desire to purchase the asset and the result of the randomization determining possession. We thus estimate the effects of: (a) learning plus possession, and (b) learning alone, relative to a control group. In the control group, 42% of individuals purchased the asset, increasing to 71% in the "social learning only" group, and to 93% in the "social learning and social utility" group. These results suggest that herding behavior in financial markets may result from social learning, and also from a desire to own the same assets as one's peers. The third chapter (co-authored with Pedro Daniel Tavares) uses data on checking and savings accounts for a sample of clients from a large bank in Brazil to calculate the prevalence and cost of "borrowing high and lending low" behavior in a setting where the spread between the borrowing and saving rates is on the order of 150% per year. We find that most clients maintain an overdrawn account at least one day a year while having liquid assets. However, the yearly amount of avoidable financial charges would only correspond, on average, to less than 0.5% of clients' yearly earnings. We also show that consumers are less likely to engage in such behavior when the costs of doing so are higher. These results suggest that the spread between the borrowing and saving rates is a key determinant of this behavior.
