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Scarcity and consumers’ credit choices

Marieke Bos (), Chloé Le Coq () and Peter van Santen ()
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Marieke Bos: Stockholm School of Economics (SHOF)
Chloé Le Coq: University of Paris II Panthéon-Assas (CRED)
Peter van Santen: University of Groningen

Theory and Decision, 2022, vol. 92, issue 1, No 5, 105-139

Abstract: Abstract We study the effect of scarcity on decision making by low income Swedes. We exploit the random assignment of welfare payments to study their borrowing decisions within the pawn and mainstream credit market. We document that higher educated borrowers borrow less frequently and choose lower loan to value ratios when their budget constraints are exogenously tighter. In contrast, low-educated borrowers do not respond to temporary elevated levels of scarcity. This lack of response translates into a significantly higher probability to default and an 11.6% increase in borrowing cost. We show that a difference in access to liquidity and/or buffer stocks cannot explain our results. Instead a framework, where the awareness of self-control problems is positively correlated with education can explain that high-educated consumers choose a lower LTV as a commitment device to increase their likelihood to repay. Analogously, low-educated with less awareness of their future self-control problems, do not tie themselves to the mast and thus ignore the consequences of their credit decisions when focusing on solving acute liquidity problems. Our findings highlight that increased levels of scarcity risk reinforcing the conditions of poverty through overborrowing.

Keywords: Poverty; Decision making; Consumer credit; Time preferences (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s11238-021-09815-2

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