Restrictions on Credit: A Public Policy Analysis of Payday Lending

Abstract

Using state level data between 1990 and 2006, we find no empirical evidence that payday lending leads to more bankruptcy filings, which casts doubt on the debt trap argument against payday lending. We capture the intensity of the payday lending activity in a state by the number of payday lending stores. We control for restrictions on payday lenders by including into the analysis six variables that we construct that rank legislative provisions across states and across time. We use two different estimation procedures: difference-in-difference and Granger causality.

Keywords: payday lending, payday loan, short term unsecured loan, cash advance, deferred deposit loan, personal bankruptcy, bankruptcy, subprime credit market, consumer finance, household finance

JEL Classification: D12, D18, D69, G28, G29, K23