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An Experimental Analysis Of The Demand For Payday Loans
By Bart J. Wilson, Associate Professor, George Mason University
David W. Findlay, Professor of Economics, Colby College
James W. Meehan, Jr., Professor of Economics, Colby College
Charissa P. Wellford, Independent Researcher
Karl Schurter, Undergraduate Student, University of Virginia
April 1, 2008

Summary

A team of five economists, researchers and academics recently completed a controlled experiment in a laboratory environment that was designed to study the impact the existence of payday loans has on individuals’ abilities to manage and overcome financial setbacks and, more specifically, whether access to credit in the form of payday loans improves or worsens the likelihood of financial survival. Their report, “An Experimental Analysis of the Demand for Payday Loans,” reveals that “allowing individuals access to payday loans improves the borrower's ability to survive financially."

The experiment involved the creation of a simulated environment, similar to one that payday advance customers face, in which the subjects were provided with limited income and financial resources, and were presented with a series of uncertain expenditures. The subjects were required to manage their finances and expenditures based on their income, including incurring late fees, utilizing overdraft protection, bouncing checks, and obtaining payday loans, as they deemed appropriate.

Report findings:

  • “Payday lending decreases the number of foreclosures that result following a natural disaster.”
  • As an example of the positive impact payday advances have on welfare, the authors cite an example of a subject who used a payday advance to manage her finances. They observe: “The loan was used to pay several bills and the person consumed no optional items. This was an effective strategy that kept the person going through these shocks.”
  • By contrast, the study demonstrates that without payday advances as an option, individuals are less likely to survive financially. For example, a subject who did not have the loan option was observed: “to be as fiscally responsible as [the subject with payday advances as an option], but without access to loans, he or she was not able to” survive as long.
  • “We find that payday loans are a means for the subjects to absorb expenditure shocks and, therefore, survive. For these individuals, the existence of payday loans raises welfare” “While some subjects’ survival was adversely affected by their use of payday loans, the majority of subjects in our experiment (i.e. 78.1% of the subjects with access to payday loans) benefited from the existence of and their subsequent use of payday loans.”



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