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The effect of interest rate caps on bankruptcy: Synthetic control evidence from recent payday lending bans

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  • Dasgupta, Kabir
  • Mason, Brenden J.

Abstract

Citing consumer protection concerns, several states have recently enacted interest rate caps on small loans. After cataloguing the history of such legislation, we test whether these laws caused a decrease in the number of payday-lending establishments and subsequently prompted variation on incidence of bankruptcy filings. To motivate a causal interpretation of our estimates, we create a synthetic control that serves as a counterfactual from which we estimate the aggregate treatment effect of these interest rate ceilings. Importantly, we estimate the treatment effect for each period after the imposition of the cap, yielding novel insights about the dynamic heterogeneity in the relationship between payday-loan access and bankruptcy. Our results show payday-lending establishments drop by approximately 100%–a banishment of the industry. We find no short-run or long-run effects of these bans on bankruptcy. The range of our estimates allows us to rule out magnitudes that were documented in several previous studies.

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  • Dasgupta, Kabir & Mason, Brenden J., 2020. "The effect of interest rate caps on bankruptcy: Synthetic control evidence from recent payday lending bans," Journal of Banking & Finance, Elsevier, vol. 119(C).
    • Handle: RePEc:eee:jbfina:v:119:y:2020:i:c:s0378426620301795
    DOI: 10.1016/j.jbankfin.2020.105917
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    Cited by:

    1. Calice,Pietro & Diaz Kalan,Federico Alfonso & Masetti,Oliver, 2020. "Interest Rate Repression : A New Database," Policy Research Working Paper Series 9457, The World Bank.
    2. Raupach, Peter & Memmel, Christoph, 2021. "Banks' credit losses and lending dynamics," Discussion Papers 36/2021, Deutsche Bundesbank.

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    More about this item

    Keywords

    Interest rate cap; Payday lending; Credit rationing; Bankruptcy; Informal bankruptcy; Synthetic control;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General

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