hilary b. miller november 2010. history of payday research prior to 2004, little scholarship...
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Hilary B. MillerNovember 2010
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
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
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
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.”
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
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?
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
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
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
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
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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