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The Real Costs of Credit Access: Evidence from the Payday Lending Market

The Real Costs of Credit Access: Evidence from the Payday Lending Market. Brian T. Melzer Kellogg School of Management Northwestern University Payday Lending Roundtable, Columbia Law School September 23, 2011. Overview.

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The Real Costs of Credit Access: Evidence from the Payday Lending Market

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  1. The Real Costs of Credit Access:Evidence from the Payday Lending Market Brian T. Melzer Kellogg School of Management Northwestern University Payday Lending Roundtable, Columbia Law School September 23, 2011

  2. Overview • How does payday lending affect economic hardship among low-income populations? • Survey data on economic hardship • Difficulty paying mortgage, rent or utilities? • Delay/forego medical or dental care? • Cut meals due to lack of money? • Pair with measure of geographic access to payday loans

  3. Motivation • Important economic question, unanswered by theory, whether credit access alleviates or exacerbates economic hardship • Access to loans can facilitate the smoothing of income or consumption shocks • However, ongoing debt service burden can also inhibit smoothing of future income or consumption shocks • Borrowers too optimistic about ability to repay loan in one period? • Self-control problems: present-biased preferences?

  4. Challenges for Empirical Analysis • Starting point: regress incidence of hardship on measure of geographic access like store presence or concentration? • But, store presence and concentration are likely correlated with hardship even absent causal effect • Stores locate in response to demand and neighborhood demographics • State policies regulating payday lending might be related to safety net policies that independently influence outcomes of interest • Need measure of geographic access that excludes variation due to store location and home-state legislative decisions

  5. Research Design • Restrict sample to payday-prohibiting states • Make use of cross-border loan access, comparing households near payday border to those far from payday borders • No identifying variation from store location choices and home-state regulations • County-level, individual-level and border controls to ensure comparability • Falsification: are payday border and non-border areas comparable before loans become available?

  6. Data • Urban Institute’s National Survey of America’s Families (NSAF) • Household survey, oversampling low-income individuals • Useful measures of economic hardship • Repeated cross-section covering 13 focal states in 1997, 1999 and 2002 • 3 focal states prohibit payday lending: MA, NJ, NY • 2000 Census for county-level controls

  7. Results: Non-Health

  8. Results: Health

  9. Additional Results • Falsification: no effect before loans are available across border • Hardship also increases over time when loans become available across the border • Differences across income groups shows effect is concentrated among those with 15 to 50k of income (vast majority of payday borrowers) • Border access effect is larger in areas with more commuting flow

  10. Implications Economic hardship – particularly difficulty paying mortgage, rent and utilities – is higher in payday access areas Consistent with view that payday loans cause, rather than alleviate, economic distress for some households

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