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Economic Scarcity and Consumers’ Credit Choice

Author

Listed:
  • Bos, Marieke

    (Stockholm School of Economics (SHOF))

  • Le Coq, Chloé

    (Stockholm School of Economics (SITE))

  • van Santen, Peter

    (Research Department, Central Bank of Sweden)

Abstract

This paper documents that increased scarcity right before a payday causally impacts credit choices. Exploiting a transfer system that randomly assigns the number of days between paydays to Swedish social welfare recipients, we find that low educated borrowers behave as if they are more present-biased when making credit choices during days when their budget constraints are exogenously tighter. As a result their default risk and debt servicing cost increase significantly. Access to mainstream credit or liquidity buffers cannot explain our results. Our findings highlight that increased levels of economic scarcity risk to reinforce the conditions of poverty.

Suggested Citation

  • Bos, Marieke & Le Coq, Chloé & van Santen, Peter, 2016. "Economic Scarcity and Consumers’ Credit Choice," Working Paper Series 329, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0329
    as

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    File URL: http://www.riksbank.se/Documents/Rapporter/Working_papers/2016/rap_wp329_161013.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    household finance; present bias; scarcity; credit choice;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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