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

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-Zinman JF  Loss aversion around prior consumption, in face of negative income shock  Anecdotal evidence

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 rule

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

Basic idea Shockumentation as a feature of a (small-dollar) consumer loan product

Antecedents

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?

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