https://macropaperwarehouse.com/authors/benjamin-j.-keys/Benjamin J. KeysHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/the-cost-of-consumer-collateral-evidence-from-bunching/https://macropaperwarehouse.com/papers/the-cost-of-consumer-collateral-evidence-from-bunching/<p>This paper estimates the shadow cost that consumers assign to pledging their primary residence as collateral, using administrative loan application and performance data from the U.S. Federal Disaster Loan (FDL) Program, which offers low-interest loans to households following natural disasters. A loan amount threshold — set at $10,000 from 2005–2007, $14,000 from 2008–2013, and $25,000 from 2014–2018 — separates uncollateralized from collateralized borrowing, with no other loan terms changing at the threshold; this sharp, discontinuous design allows the paper to use bunching estimation to identify collateral aversion. Roughly one-third of all program borrowers, and 38% of those with losses above the threshold, choose exactly the maximum uncollateralized loan amount, generating sharp mass at the threshold. Traditional bunching estimates, corroborated by two alternative approaches using household-level damage data and originally requested loan amounts, consistently find that the median borrower is willing to forgo 40–47% of their potential loan amount to avoid pledging their home as collateral, equivalent in demand terms to a 200 basis point interest rate increase. The paper also exploits threshold variation over time as an instrument for collateralization and finds that posting collateral causally reduces default rates by approximately 35%, an effect comparable in magnitude to a 100-point increase in borrower credit score, establishing that collateral substantially mitigates moral hazard in consumer lending.</p>