In harm’s way? Payday loan access and military personnel performance

Scott Carrell and Jonathan Zinman

No 08-18, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Does borrowing at 400 percent APR do more harm than good? The Pentagon asserts that payday loans harm military readiness and successfully lobbied for a binding 36 percent APR cap on loans to military members and their families (effective October 1, 2007). But existing evidence on how access to high-interest debt affects borrower behavior is inconclusive. We use within-state variation in state lending laws and exogenous variation in the assignment of Air Force personnel to bases in different states to estimate the effect of payday loan access on personnel outcomes. We find significant average declines in overall job performance and retention and significant increases in severely poor readiness. These results provide some ammunition for the private optimality of the Pentagon?s position. The welfare implications for military members are less clear-cut, but our results are consistent with the interpretation that payday loan access causes financial distress and severe misbehavior for relatively young, inexperienced, and financially unsophisticated airmen. Overall job performance declines are also concentrated in these groups, and several pieces of evidence suggest that these declines are welfare-reducing (and not the result of airmen optimally reducing effort given an expanded opportunity set); e.g., performance declines are larger in high unemployment areas with payday lending.

Keywords: Loans (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-ure
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Citations: View citations in EconPapers (16)

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Journal Article: In Harm's Way? Payday Loan Access and Military Personnel Performance (2014)
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