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Unveiling the villain: Credit supply and the debt trap

Author

Listed:
  • Fu, Shun
  • Li, Emma
  • Liao, Li
  • Wang, Zhengwei
  • Xiang, Hongyu

Abstract

Based on unique data containing the loan history and online consumption information of cash loan borrowers, we apply an exogenous credit supply shock to these borrowers and show that increased credit increases individuals' delinquency rates and reliance on cash loans. Higher credit supply increases the likelihood of a loan being overdue over 60 days by 5.7% and decreases platform exit by 33%. This effect on delinquency is significantly less prominent among individuals with greater financial literacy. Second, we demonstrate that credit expansion is positively associated with an increase in subsequent borrower consumption, particularly addictive consumption.

Suggested Citation

  • Fu, Shun & Li, Emma & Liao, Li & Wang, Zhengwei & Xiang, Hongyu, 2025. "Unveiling the villain: Credit supply and the debt trap," Journal of Empirical Finance, Elsevier, vol. 81(C).
    • Handle: RePEc:eee:empfin:v:81:y:2025:i:c:s0927539825000143
    DOI: 10.1016/j.jempfin.2025.101592
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    More about this item

    Keywords

    Credit supply; Debt trap; Cash loan; Consumer finance; FinTech;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty

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