Economic Scarcity and Consumers’ Credit Choice

Marieke Bos, Chloe Le Coq and Peter van Santen ()
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Peter van Santen: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

No 329, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: This paper documents that increased scarcity right before a payday causally impacts credit choices. Exploiting a transfer system that randomly assigns the number of days between paydays to Swedish social welfare recipients, we find that low educated borrowers behave as if they are more present-biased when making credit choices during days when their budget constraints are exogenously tighter. As a result their default risk and debt servicing cost increase significantly. Access to mainstream credit or liquidity buffers cannot explain our results. Our findings highlight that increased levels of economic scarcity risk to reinforce the conditions of poverty.

Keywords: household finance; present bias; scarcity; credit choice (search for similar items in EconPapers)
JEL-codes: D14 D81 G02 G23 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2016-10-01
New Economics Papers: this item is included in nep-ban
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