Interest rate caps and implicit collusion: the case of payday lending

Robert DeYoung and Ronnie Phillips

International Journal of Banking, Accounting and Finance, 2013, vol. 5, issue 1/2, 121-158

Abstract: Payday loans are very expensive forms of credit, and states that permit payday lending typically impose ceilings on loan prices. We test whether and how such constraints influence the pricing behaviour of payday lenders, using data on 35,098 payday loans originated in Colorado between 2000 and 2006. We find that loan prices moved upward toward the legislated price ceiling over time, a pattern that is consistent with implicit collusion facilitated by a pricing focal point. This phenomenon is accompanied by a reduction in competitive rivalry: as average prices approach the ceiling over time, statistical evidence consistent with classical price competition fades, and is replaced by evidence consistent with a variety of strategic pricing.

Keywords: implicit collusion; interest rate caps; loan pricing; payday lending; strategic pricing; price competition; credit. (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (2)

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