Essays in financial intermediation and household finance

This dissertation empirically analyzes the credit contract decisions made by borrowers. In particular, I exploit a new source of quasi-experimental variation in interest rates to study borrowers’ choices of loan amounts within a credit contract and whether borrowers’ sub-optimal decisions can be used for screening. In the setting, the interest rate schedule features discrete jumps at specific loan amount thresholds, which create strong incentives for bunching below the cutoffs. First, using bunching methods, I find substantial heterogeneity in sensitivities to interest rate changes across broad credit-rating groups. Subsequently, I examine different hypotheses for the lack of responsiveness. I find that sophistication accounts for most of the heterogeneity, while liquidity constraints, adjustment costs, and information availability play marginal roles. Finally, exploiting the introduction of the interest rate notches, I find that unresponsive borrowers are 18% more likely to default, are 24% less likely to receive funding from institutional lenders, and their loans take 20% more time to get funded. The findings suggest that borrowers’ sub-optimal credit decisions can be used to reduce information asymmetries in credit markets.Financ