Working Paper: NBER ID: w26328
Authors: Leandro Carvalho; Arna Olafsson; Dan Silverman
Abstract: The appropriateness of many high-cost loan regulations depends on whether demand is driven by financial conditions (“misfortunes”) or imperfect decisions (“mistakes”). Bank records from Iceland show borrowers have especially low liquidity just before getting a loan, but their spending is not especially low in the days before the loan arrives and some spend a substantial fraction of the loans on seemingly inessential items. Borrowers exhibit lower decision-making ability (DMA) in linked choice experiments: 45% of loan dollars go to the bottom 20% of the DMA distribution. Standard determinants of demand do not explain this relationship, which is also mirrored by the relationship between DMA and an unambiguous “mistake.” Both “misfortune” and “mistake” thus appear to drive demand.
Keywords: high-cost loans; decision-making ability; misfortune; mistake
JEL Codes: D14; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| misfortune (adverse financial conditions) (H84) | demand for high-cost loans (G21) |
| mistake (imperfect decision-making) (D91) | demand for high-cost loans (G21) |
| lower decision-making ability (DMA) (D91) | demand for high-cost loans (G21) |
| lower decision-making ability (DMA) (D91) | spending on seemingly inessential items (D12) |
| lower decision-making ability (DMA) (D91) | nonsufficient funds (NSF) fees (G21) |