Payday Loans, Uncertainty and Discounting: Explaining Patterns of Borrowing, Repayment, and Default
Open accessAbstract
Ten million American households borrowed on payday loans in 2002. Typically, to receive two weeks of liquidity from these loans households paid annualized (compounded) interest rates over 7000%. Using an administrative dataset from a payday lender, we seek to explain demand-side behavior in the payday loan market. We estimate a structural dynamic programming model that includes standard features like liquidity constraints and stochastic income, and we also incorporate institutionally realistic payday loans, default opportunities, and generalizations of the discount function. Method of Simulated Moments estimates of the key parameters are identified by two novel pieces of evidence. First, over half of payday borrowers default on a payday loan within one year of their first loans. Second, defaulting borrowers have on average already repaid or serviced five payday loans, making interest payments of 90% of their original loan's principal. Such costly delay of default, we find, is most consistent with partially naive quasi-hyperbolic discounting, and we statistically reject nested benchmark alternatives.
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Poverty is associated with a wide range of counterproductive economic behaviors.
“Poverty is associated with a wide range of counterproductive economic behaviors.”
From Poverty and economic decision making: a review of scarcity theory (2022) · cites this paper as Skiba and Tobacman 2008
The poor rely on payday loans even when annualized costs of these loans exceed 7000%.
“This may explain why the poor rely on payday loans even when annualized costs of these loans exceed 7000% (Skiba and Tobacman 2008).”
From Poverty and economic decision making: a review of scarcity theory (2022) · cites this paper as Skiba and Tobacman 2008
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Golden eggs and hyperbolic discounting
Laibson, D. (1997) · The Quarterly Journal of Economics · doi:10.1162/003355397555253 · Cited by 6,122 · see citing works
Time Discounting for Primary Rewards
McClure, S. M., Ericson, K. M., Laibson, D. I., Loewenstein, G., & Cohen, J. D. (2007) · The Journal of Neuroscience · doi:10.1523/jneurosci.4246-06.2007 · Cited by 971 · see citing works
Akerlof, G., & Akerlof, G. (1991) · Unknown · doi:10.22004/ag.econ.294661 · Cited by 849 · see citing works
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Poverty and economic decision making: a review of scarcity theory
de Bruijn, E.-J., & Antonides, G. (2022) · Theory and Decision · doi:10.1007/s11238-021-09802-7 · Cited by 277 · see citing works
“Lowincome households tend to save too little (Shurtleff 2009), to borrow repeatedly at high-interest rates (Banerjee and Duflo 2007; Skiba and Tobacman 2008), and to spend relatively large parts of money on tobacco, alcohol, and lotteries (Banerjee and Duflo 2007; Blalock et al. 2007; Haisley et…”
Normative arguments from experts and peers reduce delay discounting
Senecal, N., Wang, T., Thompson, E., & Kable, J. W. (2012) · Judgment and Decision Making · doi:10.1017/s1930297500006306 · Cited by 51 · see citing works
- Authors
- Skiba, P. M., & Tobacman, J.
- Affiliations
- Vanderbilt University (US)
- University of Delaware (US)
- Corresponding author
- Skiba, Paige Marta
- ORCID
- Tobacman, Jeremy
- Venue
- SSRN Electronic Journal
- Publisher
- Elsevier BV
- Published
- 2008
- ISSN
- 1556-5068 (ISSN-L)
- OpenAlex
- W1572335475
- Cited by
- 157
- References
- 3
- Citations by year
- 2026: 3 · 2025: 1 · 2024: 2 · 2023: 3 · 2022: 6 · 2021: 13 · 2020: 9 · 2019: 10 · 2018: 9 · 2017: 10 · 2016: 7 · 2015: 12 · 2014: 13 · 2013: 10 · 2012: 14
- Type
- posted content
- Language
- en
- Open access
- green
- doi.org
- Locations
- SSRN Electronic Journal (acceptedVersion)
- Topics
- Social Sciences › Business, Management and Accounting › Accounting › Financial Literacy, Pension, Retirement Analysis
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Microfinance and Financial Inclusion
- Social Sciences › Decision Sciences › General Decision Sciences › Decision-Making and Behavioral Economics
- Keywords
- payday loans, loan default, quasi-hyperbolic discounting, hyperbolic discounting, liquidity constraints, stochastic income, borrowing behavior, loan repayment, simulated method of moments, consumer credit market, high interest rates
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