VOL 99 NO. I ADAMS ETAL.: SUBPRIME LENDING E 810 0 0.000.100.200.300.400.500.600.700800.901.00 Fraction of loan paid FIGURE IA KERNEL DENSITY OF FRACTION OF LOAN PAID CONDITIONAL ON DEFAULT Note: Figure based on data from uncensored loans that ended in default. 0.06 0.04 0.03 0.0 0.00具 1.0-0.5 1.5 (Revenue-cost)cost FIGURE 1B. RATE OF RETURN HISTOGRAM Notes: Figure based on data from uncensored loans. Revenue is calculated as down payment t present value of loan payments present value of recovery, assuming an internal firm discount rate of 10 percent. might maximize their loan size. In the majority of cases, the present value of payments on an extra dollar borrowed is significantly less than a dollar paid up front The point applies most clearly for small changes in loan size. As we show below, smaller loans decrease th ability of default, which generates a nonconvexity in loan demand. This effect is not reflected in our calculation, which takes the default process as fixed. It is also worth noting that the incentive to borrow on the margin increases withVOL. 99 NO. 1 Adams Et al.: Subprime Lending 55 might maximize their loan size. In the majority of cases, the present value of payments on an extra dollar borrowed is significantly less than a dollar paid up front.11 11 The point applies most clearly for small changes in loan size. As we show below, smaller loans decrease the prob￾ability of default, which generates a nonconvexity in loan demand. This effect is not reflected in our calculation, which takes the default process as fixed. It is also worth noting that the incentive to borrow on the margin increases with 0.0 0.5 1.0 1.5 2.0 2.5 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 Low risk Medium risk High risk Fraction of loan paid Density Figure 1A. Kernel Density of Fraction of Loan Paid Conditional on Default Note: Figure based on data from uncensored loans that ended in default. 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 21.0 20.5 0.0 0.5 1.0 1.5 2.0 2.5 Paid loans Defaulted loans (Revenue – cost ) / cost Frequency Figure 1B. Rate of Return Histogram Notes: Figure based on data from uncensored loans. Revenue is calculated as down payment 1 present value of loan payments 1 present value of recovery, assuming an internal firm discount rate of 10 percent