Economics Colloquium / Hunt Allcott, Assoc. Professor of Economics, NYU "Are High Interest Loans Predatory? Theory and Evidence from Payday Lending"

Monday, April 5, 2021
2:30 PM - 4:00 PM (ET)
OCL Remotely through Zoom
Event Type
Conference & Symposia
Kim Minor
Economics Faculty

Are High Interest Loans Predatory? Theory and Evidence from Payday Lending

It is often argued that consumer lending regulations can increase welfare, because high-interest loans cause “debt traps” where people borrow more than they expect or would like to in the long run. We test this using an experiment with a large payday lender. Although the most inexperienced quartile of borrowers underestimate their likelihood of future borrowing, the more experienced three quartiles predict correctly on average. This finding contrasts sharply with priors we elicited from 103 payday lending and behavioral economics experts, who believed that the average borrower would be highly overoptimistic about getting out of debt. We provide a novel test showing that borrowers are willing to pay a significant premium for an experimental incentive to avoid future borrowing, which implies that they perceive themselves to be time inconsistent. We use the data on forecast accuracy and valuation of the experimental incentive to estimate a structural model of time preferences and beliefs, which we use for a behavioral welfare evaluation of common payday lending regulations. In our model, banning payday loans reduces welfare relative to existing regulation, while limits on repeat borrowing might increase welfare by inducing faster repayment that is more consistent with long-run preferences.

Zoom link
Meeting ID: 921 9869 1371 / Passcode: 572311)

Link to the paper related to his talk.

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