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Interest rate caps and implicit collusion: the case of payday lending

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  • Robert DeYoung
  • Ronnie J. Phillips

Abstract

Payday loans are very expensive forms of credit, and states that permit payday lending typically impose ceilings on loan prices. We test whether and how such constraints influence the pricing behaviour of payday lenders, using data on 35,098 payday loans originated in Colorado between 2000 and 2006. We find that loan prices moved upward toward the legislated price ceiling over time, a pattern that is consistent with implicit collusion facilitated by a pricing focal point. This phenomenon is accompanied by a reduction in competitive rivalry: as average prices approach the ceiling over time, statistical evidence consistent with classical price competition fades, and is replaced by evidence consistent with a variety of strategic pricing.

Suggested Citation

  • Robert DeYoung & Ronnie J. Phillips, 2013. "Interest rate caps and implicit collusion: the case of payday lending," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 5(1/2), pages 121-158.
  • Handle: RePEc:ids:injbaf:v:5:y:2013:i:1/2:p:121-158
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    References listed on IDEAS

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    1. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, January.
    2. Brian T. Melzer, 2011. "The Real Costs of Credit Access: Evidence from the Payday Lending Market," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 517-555.
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    4. Morgan, Donald P., 2007. "Defining and detecting predatory lending," Staff Reports 273, Federal Reserve Bank of New York.
    5. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
    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. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
    8. 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.
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