Access to Short-Term Credit and Consumption Smoothing within the Paycycle

Abstract

I study the effect of access to payday loans on the timing, level and composition of consumption. Using a newly obtained military administrative dataset of sales at on-base grocery and department stores, I examine how consumption behavior changes after the passage of a federal law that effectively bans military personnel from accessing payday loans in some states but not others. The military setting is ideal for this analysis because military personnel are assigned to locations across the United States with varying degrees of access to payday loans. Furthermore, since military personnel face varying known wait times between paycheck receipts throughout the year, I can examine daily consumption patterns in ways that were infeasible with previous datasets and surveys. I first present evidence that food expenditures spike on payday and are significantly lower at the end of a pay period; the fact that these patterns hold for perishable goods like produce indicates that food consumption is also not smooth, even over a two-week period. Then using a difference-in-difference framework, I find that payday loan access enables consumers to better smooth their consumption between paychecks, with no detectable effect on the level of food consumption. These patterns imply that payday loans enable liquidity-constrained individuals to smooth their consumption. However, I also find suggestive evidence that they lead to temptation purchases. Military personnel purchase more alcohol and electronics when given access to payday loans. Further evidence suggests that there may be significant heterogeneity in the population, with indications of present-biased preferences among some individuals and forward-looking, self controlled behavior among others.

Food Insecurity, Financial Shocks, and Financial Coping Strategies among Households with Elementary School Children in Wisconsin

“…To that end, Gjertson (2014) reports that households that save for emergencies are less likely to be food insecure, and other recent work suggests liquidity constraints are particularly salient with regards to food insecurity among the poor and those just above food assistance eligibility thresholds (Chang, Chatterjee, and Kim 2014). Consistent with the importance of liquidity constraints, some evidence suggests access to short-term credit in the form of payday loans may smooth food consumption and reduce the risk of food insecurity (Fitzpatrick 2013;Fitzpatrick and Coleman-Jensen 2014;Karlan and Zinman 2010;Zaki 2016). This research is decidedly mixed, however, with other studies finding detrimental impacts (e.g., Chang and Perry 2015).…”

High‐Cost Credit and Consumption Smoothing

“…Baugh (2015) shows that following online payday loan restrictions, households reduced bounced checks and increased consumption by 3%. On the positive side of the empirical findings, authors have found that access to payday loans mitigates foreclosures following natural disasters (Morse ), helps households smooth spending between paychecks (Zaki ), and that banning payday lending results in more bounced checks and complaints against debt collectors (Morgan, Strain, and Seblani ). Zinman () finds that capping payday loan interest rates leads to households reporting a decline in overall financial conditions.…”

Optimal mixed taxation, credit constraints, and the timing of income tax reporting

“…More recently, Michelmore and Jones () show that high cost borrowing often happens when poor households anticipate tax rebates that are paid yearly in a lump‐sum fashion. Zaki () also finds that, for consumers who do not have access to credit, food expenditures spike on payday and are significantly lower at the end of the pay period. She documents that food consumption is not smooth, even for a pay period that is biweekly.…”