We study credit market outcomes for overconfident borrowers, exploiting variation in pupils' overconfidence in mathematics across Italian provinces. Managers born in overconfident provinces make larger forecast errors on future sales, pay higher loan rates, and obtain smaller loans. Consistent with a credit market model in which borrowers have biased beliefs, access to collateralized lending relaxes the financial constraints of overconfident borrowers, leading them to borrow and invest more-yet default more frequently. We estimate that bad loans in Italy would have been 6% lower had banks relied less on collateral when lending to overconfident borrowers.
Lending to Overconfident Borrowers
De Marco, Filippo;Sauvagnat, Julien;
In corso di stampa
Abstract
We study credit market outcomes for overconfident borrowers, exploiting variation in pupils' overconfidence in mathematics across Italian provinces. Managers born in overconfident provinces make larger forecast errors on future sales, pay higher loan rates, and obtain smaller loans. Consistent with a credit market model in which borrowers have biased beliefs, access to collateralized lending relaxes the financial constraints of overconfident borrowers, leading them to borrow and invest more-yet default more frequently. We estimate that bad loans in Italy would have been 6% lower had banks relied less on collateral when lending to overconfident borrowers.
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