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An Experimental Analysis of the Demand for Payday Loans

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Author Info

  • Wilson Bart J

    ()
    (Chapman University)

  • Findlay David W.

    ()
    (Colby College)

  • Meehan James W.

    ()
    (Colby College)

  • Wellford Charissa

    ()
    (charissawellford@yahoo.com)

  • Schurter Karl

    ()
    (University of Virginia)

Abstract

The payday loan industry is one of the fastest growing segments of the consumer financial services market in the United States. We design an environment similar to the one that payday loan customers face and then conduct a laboratory experiment to examine what effect, if any, the existence of payday loans has on individuals’ abilities to manage and to survive financial setbacks. Our primary objective is to examine whether access to payday loans improves or worsens the likelihood of financial survival in our experiment. We also test the degree to which people’s use of payday loans affects their ability to survive financially. We find that payday loans help the subjects to absorb expenditure shocks and therefore survive financially. However, subjects whose demand for payday loans exceeds a certain threshold level are at a greater risk than a corresponding subject in the treatment in which payday loans do not exist.

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File URL: http://www.degruyter.com/view/j/bejeap.2010.10.1/bejeap.2010.10.1.2563/bejeap.2010.10.1.2563.xml?format=INT
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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 10 (2010)
Issue (Month): 1 (October)
Pages: 1-31

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Handle: RePEc:bpj:bejeap:v:10:y:2010:i:1:n:93

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References

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  1. Dean Karlan & Jonathan Zinman, 2007. "Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts," Working Papers 956, Economic Growth Center, Yale University.
  2. Jonathan Zinman, 2008. "Restricting consumer credit access: household survey evidence on effects around the Oregon rate cap," Working Papers 08-32, Federal Reserve Bank of Philadelphia.
  3. Michael A. Stegman & Robert Faris, 2003. "Payday Lending: A Business Model that Encourages Chronic Borrowing," Economic Development Quarterly, , vol. 17(1), pages 8-32, February.
  4. Burkey, Mark L. & Simkins, Scott P., 2004. "Factors affecting the location of payday lending and traditional banking services in North Carolina," MPRA Paper 36043, University Library of Munich, Germany.
  5. Richard Hynes & Eric A. Posner, 2002. "The Law and Economics of Consumer Finance," American Law and Economics Review, Oxford University Press, vol. 4(1), pages 168-207, January.
  6. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-79, June.
  7. H. Damar, 2009. "Why Do Payday Lenders Enter Local Markets? Evidence from Oregon," Review of Industrial Organization, Springer, vol. 34(2), pages 173-191, March.
  8. Lars Lefgren & Frank McIntyre, 2009. "Explaining the Puzzle of Cross-State Differences in Bankruptcy Rates," Journal of Law and Economics, University of Chicago Press, vol. 52(2), pages 367-393, 05.
  9. Mark Flannery & Katherine Samolyk, 2005. "Payday lending: do the costs justify the price?," Proceedings 949, Federal Reserve Bank of Chicago.
  10. Posner, Eric A., 2002. "Law and Market Economy: Reinterpreting the Values of Law and Economics, Robin Paul Malloy. Cambridge University Press, 2000, x + 179 pages," Economics and Philosophy, Cambridge University Press, vol. 18(01), pages 183-204, April.
  11. Scott Carrell & Jonathan Zinman, 2008. "In harm’s way? Payday loan access and military personnel performance," Working Papers 08-18, Federal Reserve Bank of Philadelphia.
  12. Robert DeYoung & Ronnie J. Phillips, 2009. "Payday loan pricing," Research Working Paper RWP 09-07, Federal Reserve Bank of Kansas City.
  13. Peter Kennedy, 2003. "A Guide to Econometrics, 5th Edition," MIT Press Books, The MIT Press, edition 5, volume 1, number 026261183x, December.
  14. Sumit Agarwal & Paige Marta Skiba & Jeremy Tobacman, 2009. "Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?," American Economic Review, American Economic Association, vol. 99(2), pages 412-17, May.
  15. Donald P. Morgan & Michael R. Strain, 2007. "Payday holiday: how households fare after payday credit bans," Staff Reports 309, Federal Reserve Bank of New York.
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Cited by:
  1. Cambpbell, John Y. & Jackson, Howell Edmunds & Madrian, Brigitte & Tufano, Peter, 2010. "The Regulation of Consumer Financial Products: An Introductory Essay with Four Case Studies," Scholarly Articles 4450128, Harvard Kennedy School of Government.
  2. Karlan, Dean S. & Zinman, Jonathan, 2007. "Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts," CEPR Discussion Papers 6407, C.E.P.R. Discussion Papers.
  3. John P. Caskey, 2010. "Payday lending: new research and the big question," Working Papers 10-32, Federal Reserve Bank of Philadelphia.
  4. Jonathan Zinman, 2008. "Restricting consumer credit access: household survey evidence on effects around the Oregon rate cap," Working Papers 08-32, Federal Reserve Bank of Philadelphia.
  5. Kelly D. Edmiston, 2011. "Could restrictions on payday lending hurt consumers?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I.
  6. Scott Carrell & Jonathan Zinman, 2008. "In harm’s way? Payday loan access and military personnel performance," Working Papers 08-18, Federal Reserve Bank of Philadelphia.

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