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Payday loan pricing

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Listed:
  • Robert DeYoung
  • Ronnie J. Phillips

Abstract

We estimate the pricing determinants for 35,098 payday loans originated in Colorado between 2000 and 2006, and generate a number of results with implications for public policy. We find evidence consistent with classical price competition early in the sample, but as time passed these competitive effects faded and the data become more consistent with a variety of strategic pricing practices. On average, loan prices moved upward toward the legislated price ceiling over time, consistent with implicit collusion facilitated by price focal points. Large multi-store payday firms tended to charge higher prices than independent single-store operators, but were less likely to exploit inelastic demand near military bases and in largely minority neighborhoods. Of the three loan pricing measures used in our analysis, the annual percentage interest rate (APR) favored by regulators and analysts performed poorly.

Suggested Citation

  • Robert DeYoung & Ronnie J. Phillips, 2009. "Payday loan pricing," Research Working Paper RWP 09-07, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:rwp09-07
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    File URL: https://www.kansascityfed.org/documents/5320/pdf-rwp09-07.pdf
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    Cited by:

    1. Taylor Canann & Richard Evans, 2015. "Determinants of Short-term Lender Location and Interest Rates," Journal of Financial Services Research, Springer;Western Finance Association, vol. 48(3), pages 235-262, December.
    2. 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).
    3. Wilson Bart J & Findlay David W. & Meehan James W. & Wellford Charissa & Schurter Karl, 2010. "An Experimental Analysis of the Demand for Payday Loans," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-31, October.
    4. 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.
    5. Melnik, Arie & Shy, Oz, 2015. "Exclusion, competition, and regulation in the retail loan market," Journal of Banking & Finance, Elsevier, vol. 52(C), pages 189-198.
    6. Murizah Osman Salleh & Aziz Jaafar & M. Shahid Ebrahim, 2012. "Can an interest-free credit facility be more efficient than a usurious payday loan?," Working Papers 12008, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    7. Stefanie R. Ramirez, 2019. "Payday-loan bans: evidence of indirect effects on supply," Empirical Economics, Springer, vol. 56(3), pages 1011-1037, March.
    8. Kelly D. Edmiston, 2011. "Could restrictions on payday lending hurt consumers?," Economic Review, Federal Reserve Bank of Kansas City, vol. 96(Q I).
    9. Brian T. Melzer & Donald P. Morgan, 2009. "Price-increasing competition: the curious case of overdraft versus deferred deposit credit," Staff Reports 391, Federal Reserve Bank of New York.
    10. Zinman, Jonathan, 2010. "Restricting consumer credit access: Household survey evidence on effects around the Oregon rate cap," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 546-556, March.
    11. Tamás Briglevics & Oz Shy, 2014. "Why Don’t Most Merchants Use Price Discounts to Steer Consumer Payment Choice?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 44(4), pages 367-392, June.
    12. Fekrazad, Amir, 2020. "Impacts of interest rate caps on the payday loan market: Evidence from Rhode Island," Journal of Banking & Finance, Elsevier, vol. 113(C).
    13. Oz Shy, 2014. "Measuring Some Effects Of The 2011 Debit Card Interchange Fee Reform," Contemporary Economic Policy, Western Economic Association International, vol. 32(4), pages 769-783, October.

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