Do Local Capital Market Conditions Affect Consumers' Borrowing Decisions?

Studying consumer financing decisions is difficult because of endogeneity problems and scarce data. We use new data and an exogenous change in an interest rate ceiling facing consumers seeking loans from an online peer-to-peer lending intermediary to test how access to finance affects consumers’ borrowing decisions. A differences-in-differences approach reveals that good access to local bank finance causes consumers who seek peerto-peer loans to do so at lower interest rates. We find that local finance plays a larger role in how consumers seek loans than local economic conditions like per capita income. Our results are particularly strong for borrowers with poor credit and those seeking small loans. *We are grateful for helpful comments from Jennifer Augustine, Lee Ann Butler, Timothy Crack, Ted Day, Robert Hunt, Robert Kieschnick, David Mauer, Enrichetta Ravina, Antoinette Schoar, Noah Stoffman, Charles Trzcinka, Greg Udell, Annette Vissing-Jorgensen, James Weston, Vijay Yerramilli, Lance Young, audience members at the 2011 Western Finance Association annual meeting and 2011 NBER Summer Institute Household Finance Workshop, and seminar participants at Concordia University, Georgia Tech, Indiana University, Rice University (Jones School and Economics Department), Texas Tech University, University of Memphis, University of Mississippi, University of South Florida, University of Tennessee, University of Texas at Dallas, and University of Texas at San Antonio. We thank Jefferson Duarte, Stephan Siegel, and Lance Young for providing data related to photographs posted by borrowers on Prosper.com. Any errors belong to the authors. Corresponding author: Jess Cornaggia, Kelley School of Business, Indiana University, Finance Department #370A, Bloomington, IN 47405. E-mail: [email protected]. This paper previously circulated under the title “Substitution between Sources of Finance in Consumer Capital Markets.” Do Local Capital Market Conditions Affect Consumers' Borrowing Decisions?