Consumer Credit: Too Much or Too Little (or Just Right)?

Abstract

The intersection of research and policy on consumer credit often has a Goldilocks feel. Some researchers and policymakers posit that consumer credit markets produce too much credit. Other researchers and policymakers posit that markets produce too little credit. I review theories and evidence on inefficient consumer credit supply. For each of eight classes of theories I sketch some of the leading models and summarize any convincing empirical tests of those models. I also discuss more "circumstantial" evidence that does not map tightly into a particular model but has the potential to shed light on, or obscure, answers to key questions. Overall there is a lack of convincing evidence on whether markets err, and in which direction. We do not yet understand whether and under what conditions markets over-supply or under-supply credit, much less why.

YOLO: Mortality Beliefs and Household Finance Puzzles

“…For instance, they employ precautionary savings as a mechanism (Gourinchas and Parker (2002) and Lusardi (1998)), self-control problems (O'Donoghue and Rabin (1999)), and hyperbolic discounting (Laibson (1997)). The latter of these explanations is even consistent with observed behaviors immediately prior to retirement (Brown and Previtero (2015)), but "there is little sharp evidence" that these preferences affect the household balance sheet (Zinman (2014)). To better understand why many retirees do not consume all of their assets, some have studied bequest motives (Bernheim et al (1985) and Hurd (1989)), as well as their interaction with wealth inequality (Nardi and Yang (2015)) and health (Lockwood (2014)).…”

Six Randomized Evaluations of Microcredit: Introduction and Further Steps

“…Studies of external validity would benefit from greater interplay between theory that generates predictions on where and why microcredit should work best and empirical work that tests those predictions. More broadly, there are probably bridges to build between work on microcredit and other small-dollar credit markets for consumers and their closely held businesses, and between work on these markets and the many literatures that touch on some aspect of whether and why markets supply credit (in)efficiently (Zinman 2014).…”

“…In particular there is growing concern among policymakers, advocates, and funders that one or more behavioral tendencies leads some, perhaps many, people to do themselves more harm than good by borrowing. It is worth emphasizing that there is scant evidence on how behavioral tendencies actually mediate credit impacts (Zinman 2014), and in any case, the presence of behavioral deviations from rationality may in some cases strengthen the case for microcredit rather than weaken it (Banerjee and Mullainathan 2010;Bernheim, Ray, and Yeltekin 2013;Mullainathan and Shafir 2013;Carrell and Zinman 2014). More broadly, we believe that understanding distributional effects is important in a world with growing concerns about debt traps, and here the increasing potential to develop screening and targeting technologies that maximize benefits while minimizing harm offers exciting possibilities.…”

Unshrouding Effects on Demand for a Costly Add-on: Evidence from Bank Overdrafts in Turkey

“…First, the ethical concern here presumes that high-cost consumer credit harms consumers. We emphasize the presumption; extensive research on this question suggests that a different assumption is warranted--(weakly) beneficial impacts for consumers (Zinman 2014;Banerjee, Karlan, and Zinman 2015). Second, YK's advertising was truthful and its terms were competitive.…”