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Access to Short-term Credit and Consumption Smoothing within the Paycycle

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  • Zaki, Mary

Abstract

I study the effect of access to payday loans on the timing, level and composition of consumption. Using a newly obtained military administrative dataset of sales at on-base grocery and department stores, I examine how consumption behavior changes after the passage of a federal law that effectively bans military personnel from accessing payday loans in some states but not others. The military setting is ideal for this analysis because military personnel are assigned to locations across the United States with varying degrees of access to payday loans. Furthermore, since military personnel face varying known wait times between paycheck receipts throughout the year, I can examine daily consumption patterns in ways that were infeasible with previous datasets and surveys. I first present evidence that food expenditures spike on payday and are significantly lower at the end of a pay period; the fact that these patterns hold for perishable goods like produce indicates that food consumption is also not smooth, even over a two-week period. Then using a difference-in-difference framework, I find that payday loan access enables consumers to better smooth their consumption between paychecks, with no detectable effect on the level of food consumption. These patterns imply that payday loans enable liquidity-constrained individuals to smooth their consumption. However, I also find suggestive evidence that they lead to temptation purchases. Military personnel purchase more alcohol and electronics when given access to payday loans. Further evidence suggests that there may be significant heterogeneity in the population, with indications of present-biased preferences among some individuals and forward-looking, self controlled behavior among others.

Suggested Citation

  • Zaki, Mary, 2016. "Access to Short-term Credit and Consumption Smoothing within the Paycycle," ET: Economic Theory 232213, Fondazione Eni Enrico Mattei (FEEM).
  • Handle: RePEc:ags:feemet:232213
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    References listed on IDEAS

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    1. P. Wilde & C. Ranney, "undated". "A Monthly Cycle in Food Expenditure and Intake by Participants in the U.S. Food Stamp Program," Institute for Research on Poverty Discussion Papers 1163-98, University of Wisconsin Institute for Research on Poverty.
    2. Morse, Adair, 2011. "Payday lenders: Heroes or villains?," Journal of Financial Economics, Elsevier, vol. 102(1), pages 28-44, October.
    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. 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.
    5. Bhutta, Neil, 2014. "Payday loans and consumer financial health," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 230-242.
    6. 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.
    7. Abhijit Banerjee & Sendhil Mullainathan, 2010. "The Shape of Temptation: Implications for the Economic Lives of the Poor," NBER Working Papers 15973, National Bureau of Economic Research, Inc.
    8. Donald P. Morgan & Michael R. Strain & Ihab Seblani, 2012. "How Payday Credit Access Affects Overdrafts and Other Outcomes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 519-531, March.
    9. Stephens Melvin, 2006. "Paycheque Receipt and the Timing of Consumption," Economic Journal, Royal Economic Society, vol. 116(513), pages 680-701, July.
    10. Adriana Lleras-Muney, 2010. "The Needs of the Army: Using Compulsory Relocation in the Military to Estimate the Effect of Air Pollutants on Children’s Health," Journal of Human Resources, University of Wisconsin Press, vol. 45(3).
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    12. Neil Bhutta & Paige Marta Skiba & Jeremy Tobacman, 2015. "Payday Loan Choices and Consequences," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(2-3), pages 223-260, March.
    13. Parke E. Wilde & Christine K. Ranney, 2000. "The Monthly Food Stamp Cycle: Shooping Frequency and Food Intake Decisions in an Endogenous Switching Regression Framework," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(1), pages 200-213.
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    More about this item

    Keywords

    Consumption Behavior; Short-term Credit; Environmental Economics and Policy; D14; D18; G23;

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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