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In harm’s way? Payday loan access and military personnel performance

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Author Info
Scott Carrell
Jonathan Zinman

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Abstract

Does borrowing at 400 percent APR do more harm than good? The Pentagon asserts that payday loans harm military readiness and successfully lobbied for a binding 36 percent APR cap on loans to military members and their families (effective October 1, 2007). But existing evidence on how access to high-interest debt affects borrower behavior is inconclusive. We use within-state variation in state lending laws and exogenous variation in the assignment of Air Force personnel to bases in different states to estimate the effect of payday loan access on personnel outcomes. We find significant average declines in overall job performance and retention and significant increases in severely poor readiness. These results provide some ammunition for the private optimality of the Pentagon’s position. The welfare implications for military members are less clear-cut, but our results are consistent with the interpretation that payday loan access causes financial distress and severe misbehavior for relatively young, inexperienced, and financially unsophisticated airmen. Overall job performance declines are also concentrated in these groups, and several pieces of evidence suggest that these declines are welfare-reducing (and not the result of airmen optimally reducing effort given an expanded opportunity set); e.g., performance declines are larger in high unemployment areas with payday lending.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 08-18.

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Date of creation: 2008
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Handle: RePEc:fip:fedpwp:08-18

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Keywords: Loans;

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  1. Markus K. Brunnermeier & Jonathan A. Parker, 2005. "Optimal Expectations," American Economic Review, American Economic Association, vol. 95(4), pages 1092-1118, September. [Downloadable!]
    Other versions:
  2. Mark Flannery & Katherine Samolyk, 2005. "Payday lending: do the costs justify the price?," Proceedings, Federal Reserve Bank of Chicago, issue Apr. [Downloadable!]
  3. David S. Lyle, 2006. "Using Military Deployments and Job Assignments to Estimate the Effect of Parental Absences and Household Relocations on Children's Academic Achievement," Journal of Labor Economics, University of Chicago Press, vol. 24(2), pages 319-350, April. [Downloadable!]
  4. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2002. "How Much Should We Trust Differences-in-Differences Estimates?," NBER Working Papers 8841, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Michael A. Stegman, 2007. "Payday Lending," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 169-190, Winter.
  6. Karlan, Dean S. & Zinman, Jonathan, 2007. "Expanding Credit Access: Using Randomized Supply Decisions To Estimate the Impacts," CEPR Discussion Papers 6180, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Dean Karlan & Jonathan Zinman, 2008. "Lying About Borrowing," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 510-521, 04-05. [Downloadable!] (restricted)
  8. Asch, Beth J & Warner, John T, 2001. "A Theory of Compensation and Personnel Policy in Hierarchical Organizations with Application to the United States Military," Journal of Labor Economics, University of Chicago Press, vol. 19(3), pages 523-62, July. [Downloadable!] (restricted)
  9. 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. [Downloadable!]
  10. Antecol, Heather & Cobb-Clark, Deborah A., 2008. "Racial and ethnic discrimination in local consumer markets: Exploiting the army's procedures for matching personnel to duty locations," Journal of Urban Economics, Elsevier, vol. 64(2), pages 496-509, September. [Downloadable!] (restricted)
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  11. Donald P. Morgan, 2007. "Defining and detecting predatory lending," Staff Reports 273, Federal Reserve Bank of New York. [Downloadable!]
  12. Carrell, Scott E., 2007. "The national internal labor market encounters the local labor market: Effects on employee retention," Labour Economics, Elsevier, vol. 14(5), pages 774-787, October. [Downloadable!] (restricted)
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