We use a new and accurate panel dataset from a financial account aggregation app to analyze the liquidity and consumption of payday borrowers. In line with previous studies, we find that 35% of payday borrowers would be sufficiently liquid to borrow the money less expensively using their credit cards or checking-account overdrafts. Moreover, we do not document large decreases in liquidity before the borrowing event. With respect to consumption, we find that the average borrower uses the payday loan to fund spending on unnecessary and non-durable purchases such as alcohol and restaurants. Additionally, we establish a causal link from such spending, as opposed to income, to payday borrowing using weather as an instrument. These empirical observations help to gauge the welfare consequences of payday lending because they lend support to the behavioral view that payday borrowing is caused by either self-control problems or misunderstandings about the costs of borrowing and thus should be regulated.
Olafsson, Arna and Michaela Pagel. "Payday Borrower's Consumption: Revelation of Self-Control Problems?" Columbia Business School, August 2016.
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