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In Harm's Way? Payday Loan Access and Military Personnel Performance

Scott E. Carrell

University of California, Davis - Department of Economics

Jonathan Zinman

Dartmouth College; Innovations for Poverty Action; Jameel Poverty Action Lab; National Bureau of Economic Research (NBER)

August 1, 2008

FRB of Philadelphia Working Paper No. 08-18

Does borrowing at 400 percent APR do more harm than good? The Pentagon asserts that payday loans harm military readiness and successfully lobbied for a binding 36 percent APR cap on loans to military members and their families (effective October 1, 2007). But existing evidence on how access to high-interest debt affects borrower behavior is inconclusive. We use within-state variation in state lending laws and exogenous variation in the assignment of Air Force personnel to bases in different states to estimate the effect of payday loan access on personnel outcomes. We find significant average declines in overall job performance and retention and significant increases in severely poor readiness. These results provide some ammunition for the private optimality of the Pentagon's position. The welfare implications for military members are less clear-cut, but our results are consistent with the interpretation that payday loan access causes financial distress and severe misbehavior for relatively young, inexperienced, and financially unsophisticated airmen. Overall job performance declines are also concentrated in these groups, and several pieces of evidence suggest that these declines are welfare-reducing (and not the result of airmen optimally reducing effort given an expanded opportunity set); e.g., performance declines are larger in high unemployment areas with payday lending.

Number of Pages in PDF File: 37

Keywords: Credit access, Subprime credit market, Military readiness, Financial literacy

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Date posted: September 17, 2008  

Suggested Citation

Carrell, Scott E. and Zinman, Jonathan, In Harm's Way? Payday Loan Access and Military Personnel Performance (August 1, 2008). FRB of Philadelphia Working Paper No. 08-18. Available at SSRN: https://ssrn.com/abstract=1269414 or http://dx.doi.org/10.2139/ssrn.1269414

Contact Information

Scott E. Carrell (Contact Author)
University of California, Davis - Department of Economics ( email )
One Shields Drive
Davis, CA 95616-8578
United States
Jonathan Zinman
Dartmouth College ( email )
Hanover, NH 03755
United States
603-646-0075 (Phone)
HOME PAGE: http://www.dartmouth.edu/~jzinman/
Innovations for Poverty Action
1731 Connecticut Ave, 4th floor
New Haven, CT 20009
United States
Jameel Poverty Action Lab
77 Massachusetts Avenue
Cambridge, MA 02139
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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