Consumer Law

Paper on the Relationship Between Payday Loan Size and Default Probability

By Jeff Sovern

Will Dobbie of Harvard and Paige Marta Skiba of Vanderbilt have written Information Asymmetries in Consumer Lending: Evidence from Two Payday Lending Firms.  Here's the abstract:

This paper tests for incentive and selection effects in a subprime consumer credit market using sharp discontinuities in loan eligibility rules. We find evidence of advantageous incentives and adverse selection. For a given borrower, we estimate that a $100 increase in loan size decreases the probability of default by 3.7 to 4.2 percentage points, a 20 to 23 percent decrease from the mean default rate. Borrowers who choose $100 larger loans are 6.9 to 8.0 percentage points more likely to default than borrowers who choose smaller loans.

Full post as published by CL&P Blog on January 30, 2011 (boomark / email).