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An Experimental Analysis of the Demand for Payday Loans

Author

Listed:
  • Wilson Bart J

    () (Chapman University)

  • Findlay David W.

    () (Colby College)

  • Meehan James W.

    () (Colby College)

  • Wellford Charissa

    () (charissawellford@yahoo.com)

  • Schurter Karl

    () (University of Virginia)

Abstract

The payday loan industry is one of the fastest growing segments of the consumer financial services market in the United States. We design an environment similar to the one that payday loan customers face and then conduct a laboratory experiment to examine what effect, if any, the existence of payday loans has on individuals abilities to manage and to survive financial setbacks. Our primary objective is to examine whether access to payday loans improves or worsens the likelihood of financial survival in our experiment. We also test the degree to which peoples use of payday loans affects their ability to survive financially. We find that payday loans help the subjects to absorb expenditure shocks and therefore survive financially. However, subjects whose demand for payday loans exceeds a certain threshold level are at a greater risk than a corresponding subject in the treatment in which payday loans do not exist.

Suggested Citation

  • 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.
    • Handle: RePEc:bpj:bejeap:v:10:y:2010:i:1:n:93
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    References listed on IDEAS

    as
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    Cited by:

    1. John Y. Campbell & Howell E. Jackson & Brigitte C. Madrian & Peter Tufano, 2011. "Consumer Financial Protection," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 91-114, Winter.
    2. Mary Zaki, 2016. "Access to Short-term Credit and Consumption Smoothing within the Paycycle," Working Papers 2016.07, Fondazione Eni Enrico Mattei.
    3. Dean Karlan & Jonathan Zinman, 2010. "Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts," Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 433-464, January.
    4. Kelly D. Edmiston, 2011. "Could restrictions on payday lending hurt consumers?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I.
    5. Michael Insler & Pamela Schmitt & Jake Compton, 2013. "Does everyone accept a free lunch? Decision making under (almost) zero cost borrowing," Departmental Working Papers 42, United States Naval Academy Department of Economics.
    6. 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.
    7. 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.
    8. Scott Carrell & Jonathan Zinman, 2014. "In Harm's Way? Payday Loan Access and Military Personnel Performance," Review of Financial Studies, Society for Financial Studies, vol. 27(9), pages 2805-2840.
    9. Zaki, Mary, 2016. "Access to Short-term Credit and Consumption Smoothing within the Paycycle," ET: Economic Theory 232213, Fondazione Eni Enrico Mattei (FEEM).
    10. John P. Caskey, 2010. "Payday lending: new research and the big question," Working Papers 10-32, Federal Reserve Bank of Philadelphia.

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