| Abstract: | We study a model in which firms offer financial products to individuals, post prices for their products, and screen consumers who apply to purchase them. Any information obtained in the screening process may be traded to another firm selling related products. We show that firms' ability to sell consumer information can lead to lower prices, higher screening intensities, and increased social welfare. By exploiting variations in the adoption of local financial‐privacy ordinances in five California Bay Area counties, we are able to provide simple estimates of the effects of stricter financial‐privacy laws on mortgage denial rates during 2001–2006. Consistent with the model's predictions, denial rates for home‐purchase loans and refinancing loans decreased in counties where opt‐in privacy ordinances were adopted. Moreover, estimated foreclosure start rates during the financial crisis of 2007–2008 were higher in counties where the privacy ordinance was adopted. |
