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Hilary B. Miller November 2010
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History of Payday Research Prior to 2004, little scholarship regarding the consumer-welfare effects of payday lending Consumer Credit Research Foundation formed to promote industry-supported research (I.R.C. § 501[c][3]) and policy Since 2005, numerous papers published Consumer welfare conclusions are ambiguous Access to payday credit is likely beneficial to most consumers but harmful if misused
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Competing Economic Theories Neoclassical theory Credit - even very expensive credit - enables consumers to survive “shocks” (smoothing income and expenses) Inter-temporal shifting Some consumers may be harmed by overuse Removing any economic choice is welfare-reducing Behavioral theory Imperfect self-control Optimism bias: Consumers overestimate their repayment ability Consumers have place unrealistic value on immediate consumption (hyperbolic discounting) TILA disclosures don’t contain the right info
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Key research re $64 question: welfare issue Payday Loans Are “Good” for People Morgan Morgan/Strain Morse Wilson* Stoianovici/Maloney* Zinman* _________ *CCRF funded Payday Loans Are “Bad” for People Melzer Skiba/Tobacman Carrell/Zinman Maybe Good/Maybe Bad Elliehausen/Lawrence
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Results are ambiguous Caskey (2010) (collecting studies): Evidence is ambiguous regarding consumer welfare; more study required to answer “the Big Question” Parsons and Van Weep (2010): “Welfare impact of payday lending is ambiguous.”
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Key consumer welfare results Morgan and Strain (2007): Numerous indicators of consumer distress worsened after payday was banned in NC and GA Results compared to control states with no change in payday regulation Wilson et al. (2006):* Simulated borrowing in economic laboratory Borrowers better off – unless they roll over too often Zinman (2009):* Self-reported indicators of consumer distress worsened following ban in OR Results compared to control state with no change in payday regulation (WA) _______ *CCRF funded
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Pricing is “fair” Plenty of evidence that payday lending does not provide excess economic profits: Flannery & Samolyk (2005) Huckstep (2007) Skiba (2008) Ernst & Young (2008) Who cares?
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Additional research Stango (2010):* Adjusted for risk, credit union loans are no cheaper than storefront payday loans Payday is more user-friendly than credit union Consumers prefer payday Zywicki (2009):* No logic to “protecting” consumers from high interest costs but not from, e.g., high milk costs No benefit to consumers from enhanced regulation Luea (2010):* Access to payday credit reduces certain types of crime ___________ *CCRF Funded
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Disclosure Issues Betrand and Morse (2009):* Borrowers understand that most payday customers do not repay in two weeks and are not “misled” Enhanced, draconian disclosures reduce borrowing by 5% in first-time borrowers but no material effect on experienced borrowers ___________ *CCRF funded field work
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Synthesis Considerable research shows that payday loans are helpful, at least on balance Payday loans are overwhelmingly used for longer time periods than the industry represents Overuse is harmful to some consumers Use of payday loans probably makes no difference to welfare of majority of borrowers
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Pipeline Increased demand for online loans following MT ban Comprehensive lit survey (Edmiston?) Debunk optimism bias claims Model cost-driven consumer credit (Evans) Simulate controlled experiment re welfare “Thought” piece re alternative products
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Next steps All research to date is epidemiological or experimental Need real-life randomized controlled experiment – but nearly impossible – can be simulated But: very subtle treatment effects Need to use existing research effectively and give it a longer shelf life than one news cycle Expect BCFP policy to be fact-driven Research primarily addresses storefronts: is there an evidence-based rationale for separate online treatment?
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