Per-Customer Quantity Limit and Price Discrimination: Evidence from the U.S. Residential Mortgage Market

Abstract

Theoretically, if firms face a regulatory per-customer quantity limit, they should have an incentive to discriminatively charge high-demand customers higher prices and make them just willing to buy a quantity equal to the limit. In the U.S. residential mortgage industry, mortgages with origination balances above the conforming loan limits cannot be guaranteed by Government-Sponsored Enterprises, which make lenders face a per-customer quantity limit. This paper finds that borrowers bunching at the limit pay higher interest rates due to price discrimination. This study rules out the alternative explanation that those borrowers are of higher risk (lending cost) than other borrowers.

Keywords: Price Discrimination, Quantity Limit, Mortgage, Financial Institution, Bunching

JEL Classification: L1, L5, L8, G2, R3