Payday Lending Regulation and the Demand for Alternative Financial Services

• In Event: 107 - ASA-NSF Postdoctoral Fellowship Program Research Session. Issues in Economic Sociology: Perspectives on the United States

Abstract

Poor access to credit has been tied to sustained economic and social inequality. At the same time, costly credit products like payday loans have been labeled “predatory” and tied to sustained poverty and indebtedness. In this paper we treat these arguments as two sides of the same coin, with the latter—payday lending and other Alternative Financial Services (AFS)—being a response to the former—the problem of poor access to credit. We pose the estimation of net benefit of this response as an empirical problem. We investigate this problem by measuring the effect of strict regulation and prohibition of payday lending on demand for another AFS, refund anticipation loans. Using contiguous ZIP codes pair-fixed-effects approach, we analyze longitudinal data on the entire U.S. and find an economically and statistically significant negative effect of strict regulation of payday loans on demand for refund anticipation loans. We interpret this effect as consistent with the behavioral, rather than structural explanation of the demand for AFS. The effect varies by social and economic characteristics of the communities, which suggests a direction for more effective policies to address the problem of access to credit.

Authors

• Roman V. Galperin, Johns Hopkins University

• Andrew Weaver, Massachusetts Institute of Technology