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An Experimental Analysis of the Demand for Payday Loans

Author Info

Listed author(s):
  • 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.

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Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 10 (2010)
Issue (Month): 1 (October)
Pages: 1-31

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Handle: RePEc:bpj:bejeap:v:10:y:2010:i:1:n:93
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  1. 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.
  2. Sumit Agarwal & Paige Marta Skiba & Jeremy Tobacman, 2009. "Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?," American Economic Review, American Economic Association, vol. 99(2), pages 412-417, May.
  3. Burkey, Mark L. & Simkins, Scott P., 2004. "Factors Affecting the Location of Payday Lending and Traditional Banking Services in North Carolina," The Review of Regional Studies, Southern Regional Science Association, vol. 34(2), pages 191-205.
  4. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-679, June.
  5. H. Damar, 2009. "Why Do Payday Lenders Enter Local Markets? Evidence from Oregon," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 34(2), pages 173-191, March.
  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. S. Berninghaus & W. Güth, 2007. "Experimental Economics," Chapters,in: Elgar Companion to Neo-Schumpeterian Economics, chapter 66 Edward Elgar Publishing.
  8. Mark J. Flannery & Katherine A. Samolyk, 2005. "Payday lending: do the costs justify the price?," Proceedings 949, Federal Reserve Bank of Chicago.
  9. Robert DeYoung & Ronnie J. Phillips, 2009. "Payday loan pricing," Research Working Paper RWP 09-07, Federal Reserve Bank of Kansas City.
  10. Michael A. Stegman & Robert Faris, 2003. "Payday Lending: A Business Model that Encourages Chronic Borrowing," Economic Development Quarterly, , vol. 17(1), pages 8-32, February.
  11. Richard Hynes & Eric A. Posner, 2002. "The Law and Economics of Consumer Finance," American Law and Economics Review, Oxford University Press, vol. 4(1), pages 168-207, January.
  12. 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.
  13. 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.
  14. Posner, Eric A., 2002. "Law and Market Economy: Reinterpreting the Values of Law and Economics, Robin Paul Malloy. Cambridge University Press, 2000, x + 179 pages," Economics and Philosophy, Cambridge University Press, vol. 18(01), pages 183-204, April.
  15. Peter Kennedy, 2003. "A Guide to Econometrics, 5th Edition," MIT Press Books, The MIT Press, edition 5, volume 1, number 026261183x, July.
  16. Lars Lefgren & Frank McIntyre, 2009. "Explaining the Puzzle of Cross-State Differences in Bankruptcy Rates," Journal of Law and Economics, University of Chicago Press, vol. 52(2), pages 367-393, 05.
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Cited by:

  1. 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.
  2. Zaki, Mary, 2016. "Access to Short-term Credit and Consumption Smoothing within the Paycycle," ET: Economic Theory 232213, Fondazione Eni Enrico Mattei (FEEM).
  3. 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.
  4. 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.
  5. Mary Zaki, 2016. "Access to Short-term Credit and Consumption Smoothing within the Paycycle," Working Papers 2016.07, Fondazione Eni Enrico Mattei.
  6. Campbell, John Y. & Jackson, Howell E. & Madrian, Brigitte C. & Tufano, Peter, 2010. "The Regulation of Consumer Financial Products: An Introductory Essay with Four Case Studies," Working Paper Series rwp10-040, Harvard University, John F. Kennedy School of Government.
  7. Kelly D. Edmiston, 2011. "Could restrictions on payday lending hurt consumers?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I.
  8. John P. Caskey, 2010. "Payday lending: new research and the big question," Working Papers 10-32, Federal Reserve Bank of Philadelphia.
  9. 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.
  10. 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.

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