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Interest rate caps and implicit collusion: the case of payday lending

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  • Robert DeYoung
  • Ronnie J. Phillips

Abstract

Payday loans are very expensive forms of credit, and states that permit payday lending typically impose ceilings on loan prices. We test whether and how such constraints influence the pricing behaviour of payday lenders, using data on 35,098 payday loans originated in Colorado between 2000 and 2006. We find that loan prices moved upward toward the legislated price ceiling over time, a pattern that is consistent with implicit collusion facilitated by a pricing focal point. This phenomenon is accompanied by a reduction in competitive rivalry: as average prices approach the ceiling over time, statistical evidence consistent with classical price competition fades, and is replaced by evidence consistent with a variety of strategic pricing.

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Bibliographic Info

Article provided by Inderscience Enterprises Ltd in its journal Int. J. of Banking, Accounting and Finance.

Volume (Year): 5 (2013)
Issue (Month): 1/2 ()
Pages: 121-158

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Handle: RePEc:ids:injbaf:v:5:y:2013:i:1/2:p:121-158

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Web page: http://www.inderscience.com/browse/index.php?journalID=277

Related research

Keywords: implicit collusion; interest rate caps; loan pricing; payday lending; strategic pricing; price competition; credit.;

References

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  1. 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.
  2. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  3. Donald P. Morgan, 2007. "Defining and detecting predatory lending," Staff Reports 273, Federal Reserve Bank of New York.
  4. 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.
  5. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
  6. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
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