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Sheisha Kulkarni – UC Berkeley / UVA Economics
14 December 2018 @ 11:00 am - 12:30 pm
Removing the Fine Print: Standardization, Disclosure, and Consumer Outcomes
Consumers face a choice when evaluating financial contracts: study the fine print and incur a cognitive cost or ignore it and risk costly surprises in future. We use a pair of policy changes in Chile to contrast two measures to protect consumers from fine print: the first improves disclosure and the second standardizes and regulates contract features. With administrative data from the banking regulator on consumer loans, we use a regression discontinuity design to estimate the causal effects of these regimes. Consumers offered standardized contracts experienced 40% (14.4 percentage points) less delinquency. Using a difference-in-differences design, we find that sophisticated borrowers are helped most by increased disclosure, while unsophisticated borrowers benefit more from product standardization. Additionally, we show that only sophisticated borrowers—who benefit from the informational disclosure treatment—leave less “money on the table”. We contextualize these results in a stylized model that predicts that financially sophisticated will benefit from disclosure while unsophisticated borrowers will benefit from standardization based on differentials in the cost of studying.