An Experimental Analysis of the Demand for Payday Loans

Abstract:     
The payday loan industry is one of the fastest growing segments of the consumer financial services market in the United States. The purpose of our study is to design an environment similar to the one that payday loan customers face. We then conduct a laboratory experiment to examine what effect, if any, the existence of payday loans has on individuals' abilities to manage and to survive financial setbacks. Our primary objective is to examine whether access to payday loans improves or worsens the likelihood of survival in our experiment. We also test the degree to which people's use of payday loans affects their ability to survive financial shocks. We find that payday loans help the subjects to absorb expenditure shocks and, therefore, survive. However, subjects whose demand for payday loans exceeds a certain threshold level are at a greater risk than a corresponding subject in the treatment in which payday loans do not exist.

Keywords: Payday Loans, Experimental Economics

JEL Classifications: D14, C9

Working Paper Series