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Misfortune and Mistake: The Financial Conditions and Decision-making Ability of High-cost Loan Borrowers

Leandro Carvalho, Arna Olafsson and Dan Silverman

No 26328, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D14 G2 (search for similar items in EconPapers)
Date: 2019-09
New Economics Papers: this item is included in nep-ban
Note: PE
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Citations: View citations in EconPapers (7)

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