The Welfare Benefits of Pay-As-You-Go Financing

Paul Gertler, Brett Green, Renping Li and David Sraer

No 33484, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Pay-as-you-go (PAYGo) financing is a novel contract that has recently become a popular form of credit, especially in low- and middle-income countries (LMICs). PAYGo financing relies on lockout technology that enables the lender to remotely disable the flow benefits of collateral when the borrower misses payments. This paper quantifies the welfare implications of PAYGo financing. We develop a dynamic structural model of consumers and estimate the model using a multi-arm, large scale pricing experiment conducted by a fintech lender that offers PAYGo financing for smartphones. We find that the welfare gains from access to PAYGo financing are equivalent to a 3.4% increase in income while remaining highly profitable for the lender. The welfare gains are larger for low-risk consumers and consumers in the middle of the income distribution. Under reasonable assumptions, PAYGo financing outperforms traditional secured loans for all but the riskiest consumers. We explore contract design and identify variations of the PAYGo contract that further improve welfare.

JEL-codes: D14 D86 G21 G23 (search for similar items in EconPapers)
Date: 2025-02
New Economics Papers: this item is included in nep-cfn, nep-fdg and nep-pay
Note: CF DEV IO PR
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