Bankruptcy

Asymmetric Paternalism

By Paige Marta Skiba

With the growing evidence on behaviors that deviate from the rational-choice model, a discussion on paternalism is taking center stage. As an economist, I am pretty averse to taking choices away from people, but can we have our cake and eat it too? Enter ?asymmetric paternalism.?

?A regulation is asymmetrically paternalistic if it creates large benefits for those who make errors, while imposing little or no harm on those who are fully rational..."

writes George Loewenstein and coauthors in ?Regulation for Conservatives: Behavioral Economics and the Case for 'Asymmetric Paternalism.? A simple example is arranging the food in a cafeteria with the healthiest foods first. This would increase the consumption of healthy foods, while not limiting access to unhealthy food for those who rationally want to have their cake.

Recent regulatory action involving payday loans would certainly be on the more heavy-handed end of paternalism: More than a dozen states have banned or restricted payday lending. Restrictions on payday lenders go beyond state regulators too. In 2007, Congress limited interest rates payday lenders could charge to military personnel to 36% APR. No lender is willing (or able) to charge so little interest so this effectively eliminated payday loans to the military.

Certainly people use payday loans for different reasons, some perfectly rational, some perhaps not. So what does asymmetric paternalism look like in payday loan regulation? That?s a tough one. The FDIC?s recent restriction on the number of days per year a borrower could be indebted to a payday lender might be viewed as attempting to impose little harm on those who are borrowing 100% rationally while limiting payday loan use for those who are irrational.

As an aside, in the regulatory context, we should also think about where (and if) people will turn for loans if payday loans are not available. I find, not surprisingly, that people who can?t get a payday loan are more likely to borrow at a pawnshop within a day or two. I've also heard anecdotes that loan sharks are popping up outside check-cashing stores to offer people illegal loans in states where payday loans are not available. The one thing that could unequivocally create large benefits to everyone touched by this debate is more research.

Full post as published by Credit Slips on March 21, 2008 (boomark / email).