Job Market Paper
Selective Outreach and Targeted Interest Rate Caps
In credit markets where lenders selectively contact potential borrowers, lending reflects lenders' offer and borrowers' acceptance decisions. By lowering prices, an interest rate cap can increase acceptance while reducing lenders’ incentive to extend offers. When the cap targets a specific sector, changes in relative profitability can lead lenders to reallocate offers across sectors. This paper studies these forces using a reform that introduced an interest rate cap on agricultural loans in Ecuador. After the reform, cooperatives’ lending shifted toward the non-agricultural sector while banks’ agricultural lending expanded. I estimate a model of selective outreach to quantify the offer and acceptance responses and the role of targeting. I find that banks and cooperatives reduced offers to agricultural borrowers, outweighing the increase in acceptance and reducing aggregate agricultural lending and welfare. The regulation shifted acceptance toward banks, whose prices fell more due to the cap, allowing their lending to increase despite fewer offers. Targeting magnified the offer contraction, accounting for most of the lending reduction and generating welfare losses in the agricultural sector. The results show that, by influencing the relative strength of the offer and acceptance responses, policy design shapes the cap's ultimate effects.