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Financial Products Innovation Fund Working Group Meeting

SHOCK - umentation. Financial Products Innovation Fund Working Group Meeting . Jonathan Zinman Dartmouth College and IPA’s U.S. Household Finance Initiative. July 26, 2013. Theories of unproductive consumer borrowing . Temptation

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Financial Products Innovation Fund Working Group Meeting

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  1. SHOCK-umentation Financial Products Innovation Fund Working Group Meeting Jonathan Zinman Dartmouth College and IPA’s U.S. Household Finance Initiative July 26, 2013

  2. Theories of unproductive consumer borrowing • Temptation • Vissing-Jorgensen paper on luxury spending predicting default • Over-optimism about, inattention to, how will pay back • Anecdotal evidence • Price misperceptions • Correlation evidence in Stango-ZinmanJF • Loss aversion around prior consumption, in face of negative income shock • Anecdotal evidence

  3. Theories of “productive” consumer borrowing • “Investment” broadly defined to include job retention, skill-building, health • Evidence from microcredit RCTs consistent with this • Most strikingly Karlan-Zinman RFS on job retention • The 80 in the 80-20 rule

  4. Objective Lend to the 80 Ration the 20 (or: adjust price per risk)

  5. Basic idea Shockumentationas a feature of a (small-dollar) consumer loan product

  6. Antecedents

  7. Key Design Issue: Disbursement • Disbursement directly to seller of the investment good? • Or can do without? • Copy of invoice? Receipt? • Scalable channel: submit by smartphone?

  8. Other Design Issues Which shocks to lend against? Shockumentationas requirement, or as price/term concession?

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