When demand is elastic, search costs can result in significant
deadweight loss. We estimate how search frictions in credit
markets distort final-goods consumption, contribute to substantial
price dispersion, and modulate the pass-through of interest-rate
shocks. Using rich microdata from millions of auto-loan
applications and originations by hundreds of financial providers,
we isolate plausibly exogenous variation in interest rates due to
institution-specific pricing rules that price risk with step functions.
These discontinuities lead to substantial variation in the benefits of
search, affect physical search behavior, and distort extensive- and
intensive-margin loan and car choices through quasi-random
interest-rate markups. We further show that these discontinuities
are more consequential in areas we measure as having high
search costs. Overall, our results provide evidence of the real
effects of the costliness of shopping for credit, the continued
importance of local bank branches, and how search frictions inhibit
the transmission of monetary policy to durable goods purchases.
More broadly, we conclude that the welfare consequences of
costly search include inefficient consumption in both primary and
related markets.