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American Economic Journal: Applied Economics: Vol. 5 No. 4 (October 2013)

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Information Asymmetries in Consumer Credit Markets: Evidence from Payday Lending

Article Citation

Dobbie, Will, and Paige Marta Skiba. 2013. "Information Asymmetries in Consumer Credit Markets: Evidence from Payday Lending." American Economic Journal: Applied Economics, 5(4): 256-82.

DOI: 10.1257/app.5.4.256

Abstract

Information asymmetries are prominent in theory but difficult to estimate. This paper exploits discontinuities in loan eligibility to test for moral hazard and adverse selection in the payday loan market. Regression discontinuity and regression kink approaches suggest that payday borrowers are less likely to default on larger loans. A $50 larger payday loan leads to a 17 to 33 percent drop in the probability of default. Conversely, there is economically and statistically significant adverse selection into larger payday loans when loan eligibility is held constant. Payday borrowers who choose a $50 larger loan are 16 to 47 percent more likely to default.

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Authors

Dobbie, Will (Harvard U)
Skiba, Paige Marta (Vanderbilt U)

JEL Classifications

D14: Household Saving; Personal Finance
D82: Asymmetric and Private Information; Mechanism Design
G21: Banks; Depository Institutions; Micro Finance Institutions; Mortgages

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