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Expanding Credit Access: Using Randomized Supply Decisions To Estimate The Impacts
By Dean Karlan, Assistant Professor of Economics at Yale University
Jonathan Zinman, Assistant Professor of Economics at Dartmouth College
July 2007

Summary

Access to credit significantly improves the lives of consumers. That was the conclusion that Dean Karlan, an Assistant Professor of Economics at Yale University, and Jonathan Zinman, an Assistant Professor of Economics at Dartmouth College, reach in their study "Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts." The authors reach this conclusion after conducting an experiment of high-risk, high-interest, similar to payday advances, loans made to consumer in South Africa. The objective of the study was to assess the impact of expanding high-interest credit to applicants who would ordinarily be rejected for this form of credit. Karlan and Zinman observe that consumer lending benefits borrowers, as is evidenced by the fact that individuals using these loans were less likely to be in poverty, hungry or malnourished, and less likely to have lost their jobs.

Report findings:

  • “We find that expanded access to credit significantly improved [borrowers’ well-being]. Over the 6 to 12 month horizon, applicants in the treatment group were significantly more likely to retrain their job over the study period, and treatment group incomes were significantly higher.”
  • "The most common purpose for household borrowing is paying off other debt. This suggests that [loans] may be used to economize on interest expenses, and to maintain access to other credit sources by permitting timely repayment."
  • "[L]oans produced significant benefits for borrowers across a wide range [of] economic and well-being outcomes.... The results suggest that consumer credit expansions can be welfare-improving."
  • "Most importantly, we do not find any evidence that the net effects of expanded access to expensive consumer credit are negative."
  • "The default policy prescription in South Africa and much of the rest of the world (including parts of the U.S.) is to restrict access [to high-risk, high-interest credit] based on the presumption that vulnerable consumers overborrow in these markets. Our evidence casts doubt on this presumption and suggests that revealed preference carries the day: our consumers who borrowed at 200% benefited from doing so, at least relative to their outside options."



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