Research

Rationalizing the Payday Loan Puzzle: A Credit Scoring Explanation, with Tsung-Hsien Li

CRC TR 224 DP No. 324, December 2021 [Link]

Abstract: Many credit cardholders in the U.S. turn to expensive payday loans, even though they have not yet exhausted their credit lines. This results in significant monetary costs and has been coined the ``Payday Loan Puzzle.'' We propose the novel explanation that households use payday loans to protect their credit scores since payday lenders do not report to credit bureaus. To quantitatively examine this hypothesis, we build a two-asset Huggett-type model with two default options as well as both hidden information and actions. Using our calibrated model, we can account for 40% of the empirically identified payday loan borrowers with liquidity left on their credit cards. We can also match the magnitude of monetary costs due to this seeming pecuniary mistake. To inform the policy debate over payday lending, we assess the welfare implications of several policy counterfactuals. We find that either banning payday loans or increasing their default costs results in a welfare loss in aggregate.

Non-technical summaries: Banning Payday Loans Lowers Household’s Welfare, Study Says | German Version: Studie: Verbot von Kurzzeitkrediten führt zu Wohlstandsverlusten (published on CRC TR 224)

The Role of Marital Status for the Evaluation of Bankruptcy Regimes

CRC TR 224 DP No. 361, July 2022 [Link]

Abstract: The consumer finance literature has emphasized the importance of income and expense risk for the evaluation of bankruptcy regimes. Single and married households differ in the risks they face. In this paper, I build the first quantitative consumer default model that explicitly models singles and couples. I calibrate my model to the United States in 2019 and estimate (medical) expense shocks separately for single and married individuals. My calibrated model generates large differences in bankruptcy rates across marital status as in the data. I examine how the preferred degree of bankruptcy leniency differs between singles and couples. There are several channels at work: Differences on the income side between singles and couples cause couples to prefer a stricter bankruptcy regime due to the intra-household insurance channel. However, increased risk for couples due to divorce and on the expense side outweigh the first channel. The net effect is that couples prefer more lenient bankruptcy than singles. My findings suggest that marital status is important to take into account for the evaluation of bankruptcy regimes.