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The Welfare Effects of Law Enforcement in the Illegal Money Lending Market

Author

Listed:
  • Leong, Kaiwen

    (Nanyang Technological University, Singapore)

  • Li, Huailu

    (Fudan University, China)

  • Pavanini, Nicola

    (Tilburg University)

  • Walsh, Christoph

    (Tilburg University)

Abstract

We estimate a structural model of borrowing and lending in the illegal money lending market using a unique panel survey of 1,090 borrowers taking out 11,032 loans from loan sharks. We use the model to evaluate the welfare effects of alternative law enforcement strategies. We find that a large enforcement crackdown that occurred during our sample period raised interest rates, lowered the volume of loans, increased the lenders' unit cost of harassment, decreased lender profits, and decreased borrower welfare. We compare this strategy to targeting borrowers and find that targeting medium-performing borrowers is the most effective at lowering lender profits.

Suggested Citation

  • Leong, Kaiwen & Li, Huailu & Pavanini, Nicola & Walsh, Christoph, 2022. "The Welfare Effects of Law Enforcement in the Illegal Money Lending Market," IZA Discussion Papers 15359, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp15359
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    References listed on IDEAS

    as
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    5. Donald P. Morgan & Michael R. Strain & Ihab Seblani, 2012. "How Payday Credit Access Affects Overdrafts and Other Outcomes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 519-531, March.
    6. Aleem, Irfan, 1990. "Imperfect Information, Screening, and the Costs of Informal Lending: A Study of a Rural Credit Market in Pakistan," The World Bank Economic Review, World Bank, vol. 4(3), pages 329-349, September.
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    More about this item

    Keywords

    illegal money lending; loan sharks; law enforcement; crime;
    All these keywords.

    JEL classification:

    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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