Poster #142 - Assessing the Effects of Alternative Financial Services Regulations on Food Insecurity amid Natural Disasters

• In Event: Friday Poster Reception

Abstract

The ongoing debate regarding the impact of high-interest credit on individuals’ financial distress has led to varied state regulations in the alternative financial services (AFS) sector, including payday lending bans aimed at protecting financially vulnerable populations. Researchers utilizing state-to-state variations in laws have produced mixed findings regarding AFS’s impact on economic well-being. Some studies indicate that AFS exacerbates hardship (Fitzpatrick, 2024; Koku & Jagpal, 2015; Melzer, 2011), while others suggest a positive impact (Morse, 2011; Servon, 2017) or little to no effect (Bhutta, 2014; Chen et al., 2022). Estimating a causal effect remains challenging due to the unobserved risk among typical AFS users, leaving the justification for heavy regulation and prohibition uncertain. 

This study investigates the impact of AFS access on communities' ability to cope with natural disasters. Using geographic variations in the AFS market environments and disaster risks, we assess whether AFS access helps mitigate the adverse effects of natural disasters on community economic well-being, as reflected in food insecurity. Specifically, we estimate:

Yij = a1 + a2 NRI_ij + a3 AFS_ij + a4 NRI_ij*AFS_ij + b Xij + cj + eij

Where Yij represents the food insecurity in tract i and state j, NRI denotes the national risk index, and AFS measures AFS availability relative to banks. X denotes socio-demographic covariates, including racial composition, median income, homeownership, and median home value. We also incorporate state fixed effects to account for the state-level policy environment relevant to food insecurity, such as SNAP. Since AFS availability can be endogenous, it is instrumented by proximity to the state border combined with the neighboring state’s AFS regulatory regime. Linear regression coefficients are obtained with robust standard errors adjusted for county-level clustering of errors. A negative a4 would indicate a role of AFS in mitigating hardship. As the preliminary estimates suggested heteroskedascity, we also obtained the coefficients at different conditional quantiles. 

Our dataset integrates 2021 CDC PLACES data (CDC.gov, 2024), 2021 FEMA National Risk Index data (FEMA, 2024), 2020 American Community Survey data (IPUMS, 2023), and 2021 County Business Patterns dataset (U.S. Census Bureau, 2023). After excluding unmatched observations, analysis was conducted on a sample of n=62,888 Census tract-level observations. The CDC PLACES data provides food insecurity rates for each Census tract. The National Risk Index, developed by FEMA, assigns a relative level of natural hazard risk based on factors such as exposure risk and historical loss ratios across 18 different hazards. The socio-demographic controls were sourced from the 2021 American Community Survey (ACS), and the number of banks and AFS establishments was extracted from the 2021 County Business Patterns data.

Findings indicate that although both natural disaster risks and access to AFS independently predict higher food insecurity, access to AFS can ease the adverse effects of natural disasters in certain communities. This aligns with existing studies that indicate short-term nonbank credit can serve as a market-driven safety net for those in urgent need. They also suggest that blanket bans on AFS might deprive households of crucial financial resources they could leverage effectively.

Author

• Yunhee Chang, University of Mississippi
  Presenting Author