Strategic Pricing of Payday Loans: Evidence from Colorado, 2000-2005

Robert DeYoung and Ronnie Phillips

No 2006-WP-05, NFI Working Papers from Indiana State University, Scott College of Business, Networks Financial Institute

Abstract: We examine the pricing patterns of payday lenders in Colorado between 2000 and 2005, using Tobit estimation techniques to account for legislated price ceilings, and a Heckman correction procedure to correct for locational choices made by payday lenders. Our preliminary results contain evidence that payday lenders practice several types of strategic pricing. Consistent with Knittel and Stango (2003), we find evidence consistent with focal point pricing: over time, payday loan prices in Colorado have gravitated toward the legislated price ceiling. Moreover, prices moved toward the ceiling more quickly in markets containing large numbers of payday lenders, where explicit collusion may be more difficult and the existence of a focal point can facilitate implicit price collusion. Consistent with Petersen and Rajan (1994), we find evidence consistent with potentially exploitative relationship pricing: prices were lower for initial loans than for refinanced loans, and this inter-temporal pricing pattern was more pronounced when payday lenders faced fewer local rivals, i.e., when switching costs were high for borrowers. We also find a positive association between payday loan prices and the presence of commercial bank branches in the local market—because payday borrowers must have a bank account on which to write a check, this suggests that commercial bank branches act as a complement to payday lending that increase the demand for payday lending services. Indeed, we find that payday lenders are more likely to locate in well-branched areas.

Keywords: Payday loans; alternative finance; financial regulation; banking (search for similar items in EconPapers)
Pages: 38 pages
Date: 2006-08
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Citations: View citations in EconPapers (2)

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Working Paper: Strategic pricing of payday loans: evidence from Colorado, 2000-2005 (2007)
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