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Cash-on-hand and demand for credit

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  • Can Cui

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Abstract

Abstract Subprime consumers often use small-dollar credit products, such as payday loans, to meet short-term financial needs over pay cycles. However, relatively little is known about the income sensitivity of demand for credit in this market. This paper provides a causal estimate of the effect of tax rebates on the demand for small-dollar credit, using a unique proprietary loan-level dataset. Identification relies on variation in state Earned Income Tax Credit (EITC) generosity for areas within the same commuting zones that span state borders. The results show that a $100 increase in EITC benefits leads to an 8.3% reduction in the number of loan applications and a 6.6% reduction in the number of borrowers. This could translate into sizable reductions in loan volume and savings in financial charges. More broadly, the results suggest that public programs with income benefits could help recipients with consumption smoothing in the presence of credit market frictions.

Suggested Citation

  • Can Cui, 2017. "Cash-on-hand and demand for credit," Empirical Economics, Springer, vol. 52(3), pages 1007-1039, May.
  • Handle: RePEc:spr:empeco:v:52:y:2017:i:3:d:10.1007_s00181-016-1213-2
    DOI: 10.1007/s00181-016-1213-2
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    References listed on IDEAS

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    More about this item

    Keywords

    Tax refunds; Payday loans; Liquidity constrain;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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