Working Paper: CEPR ID: DP16779
Authors: Nicola Pavanini; Kaiwen Leong; Huailu Li; Christoph Walsh
Abstract: We estimate a structural model of borrowing and lending in the illegal money lending market using a unique panel survey of 1,090 borrowers taking out 11,032 loans from loan sharks. We use the model to evaluate the effects of interventions aimed at limiting this market. We find that an enforcement crackdown that occurred during our sample period increased lenders’ unit cost of harassment and interest rates, while lowering volume of loans, lender profits and borrower welfare. Policies removing borrowers in the middle of the repayment ability distribution, reducing gambling or reducing time discounting are also effective at lowering lender profitability.
Keywords: illegal money lending; loan sharks; law enforcement; crime
JEL Codes: K42; G51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Crackdown on lenders (G21) | Increase in lenders' unit cost of harassment (G21) |
| Crackdown on lenders (G21) | Increase in interest rates (E43) |
| Crackdown on lenders (G21) | Decrease in volume of loans disbursed (G21) |
| Crackdown on lenders (G21) | Decrease in lender profits (G21) |
| Crackdown on lenders (G21) | Decrease in borrower welfare (G51) |
| Targeting medium-performing borrowers (G51) | Reduction in lender profits (G21) |