Preliminary and Incomplete

This paper explores the implications of technological progress in consumer lend-ing. The model features households who differ in endowment risk. The bor-rower’s risk type is private information, and intermediaries observe a noisy signal of each borrower’s default risks. To offer a lending contract, an interme-diary incurs a fixed cost. Each lending contract is comprised of an interest rate, a borrowing limit and a set of eligible borrowers. Technological improvements which lead to more accurate signals of a borrowers type or lower the cost of offering a contract increase the number of contracts offered and lead to the extension of credit to riskier households. This results in higher aggregate levels of defaults and borrowing. To corroborate the predictions of the model, we examine data on credit card borrowing reported by households in the Survey of Consumer Finance. We find that the number of different credit card interest rates reported has increased and that the empirical density of credit card inter-est rates has become more disperse since 1983. We also document that lowe