Essays on Multidimensional Private Information in the Consumer Credit Market

In these essays, I study how multidimensional private information causes advantageous selection in a highly concentrated consumer credit market. All three chapters are tightly correlated with each other. I first carefully investigate conditional correlations between choices of a loan type, private default risks, and an additional private information on consumption smoothing motives. I find that their conditional correlations appear consistent with advantageous selection being driven by unobserved heterogeneity in consumption smoothing motives. Then I document how moral hazard links two dimensions of private information: consumption smoothing motives and default risks. By separately identifying moral hazard from adverse selection, I show that consumers with stronger consumption smoothing motives exert more effort to prevent default, generating an endogenous negative association between consumption smoothing motives and default risks. Finally, using a dynamic model of loan type choices and following outcome of default, I recover the joint distribution of bi-dimensional unobserved heterogeneity. This structural estimation also suggests a new way to estimate the inter-temporal elasticity of substitution that represents heterogeneous consumption smoothing motives. As well as being consistent with the results of previous chapters, the results of the structural estimation reveal a strong and positive correlation between inter-temporal elasticity of substitution and default risks.