Unconditional Cash Transfers and High-Cost Credit Use: Evidence from the Alaska Permanent Fund

• In Event: Challenging Inequality through Federal, State, and Local Policy Partnerships

Abstract

American households often turn to unsecured credit to manage everyday expenses when earnings and public benefits fall short. American credit markets are stratified; the highest-income households have access to a wide variety of relatively low-cost mainstream consumer credit products, while the lowest-income households have access only to high-cost alternative credit products. Prior research finds that the generosity and inclusiveness of social insurance and means-tested safety net policies shapes inequalities in unsecured credit use. However, relatively little is known about how unconditional cash transfer programs shape disparities in high-cost debt. In this paper, we study the effects of the Alaska Permanent Fund (APF) Dividend on income disparities in households' reliance on a variety of unsecured consumer credit instruments, including alternative financial services loans (e.g. payday and installment loans), personal finance loans, and credit cards. We use a 1% random national sample of proprietary credit report data obtained from one of the three large U.S. credit bureaus and two-way fixed effects models that leverage exogenous year-to-year variation in the amount of the APF Dividend to identify the effects of this unconditional cash transfer program on Alaskan's credit use relative to households living in other states. Preliminary results suggest that increases in the generosity of the APF Dividend are associated with large reductions in income disparities in alternative financial services loan use, with effects driven by a significant substitution away from payday and installment loans among the lowest-income households. Our results ultimately provide new evidence for the credit-welfare state tradeoff by focusing on a large-scale unconditional cash transfer program and support arguments that the unique flexibility provided by such programs reduces inequality by protecting economically vulnerable populations from having to turn to high-cost credit.

Authors

• Alec P. Rhodes, Purdue University
  Presenting Author

• Lawrence M. Berger, University of Wisconsin-Madison
  Non-Presenting Co-Author

• Rachel Dwyer, The Ohio State University
  Non-Presenting Co-Author

• Jason N Houle, Dartmouth College
  Non-Presenting Co-Author