Economic Scarcity and Consumers’ Credit Choice
54 Pages Posted: 7 Oct 2016 Last revised: 19 May 2017
Date Written: May 1, 2017
This paper documents that increased scarcity right before a payday causally impacts credit choices. Exploiting a transfer system that randomly assigns the number of days between paydays to Swedish social welfare recipients, we find that low-educated borrowers behave as if they are more present-biased when making credit choices during days when their budget constraints are exogenously tighter. As a result, their default risk and debt-servicing cost increase significantly. Access to mainstream credit or buffer stocks cannot explain our results. Our findings highlight that increased levels of economic
scarcity risk reinforcing the conditions of poverty.
Keywords: Household finance, Scarcity, Credit Choice
JEL Classification: G02, G23, D14, D81
Suggested Citation: Suggested Citation