Auto Dealer Loan Intermediation: Consumer Behavior and Competitive Effects

Abstract: This paper studies the intermediation of auto loans through auto dealers using new and comprehensive data. Lenders give auto dealers discretion to price loans. The first part of our project leverages details of the contracts between lenders and dealers to demonstrate that many consumers are substantially less responsive to finance charges than to vehicle charges. This wedge in responsiveness is particularly pronounced for consumers with low income as well as consumers living in areas with low education levels. Dealers take this consumer-specific wedge into account when jointly pricing the car and the loan, leading to a form of price discrimination. We then estimate an equilibrium model that allows us to explore the implications of this wedge in an oligopolistic market. Counterfactual exercises demonstrate that the wedge in responsiveness has a substantial impact on dealer pricing behavior, consumer surplus, and the distribution of prices across areas with low and high income. Finally, we explore what happens if dealers have no discretion to price loans. Because of an effect reminiscent of double marginalization, we find that total prices would increase and consumer surplus would fall.