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Economic Scarcity and Consumers’ Credit Choice

52 Pages Posted: 7 Dec 2016 Last revised: 13 Jan 2017

Marieke Bos

Swedish House of Finance - Stockholm School of Economics

Chloe Le Coq

SITE-Stockholm School of Economics

Peter van Santen

Sveriges Riksbank; Netspar

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Date Written: October 1, 2016

Abstract

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 liquidity buffers cannot explain our results. Our findings highlight that increased levels of economic scarcity risk to reinforce the conditions of poverty.

Keywords: household finance, present bias, scarcity, credit choice

JEL Classification: G02, G23, D14, D81

Suggested Citation

Bos, Marieke and Le Coq, Chloe and van Santen, Peter, Economic Scarcity and Consumers’ Credit Choice (October 1, 2016). Sveriges Riksbank Working Paper Series No. 329; Swedish House of Finance Research Paper No. 17-2. Available at SSRN: https://ssrn.com/abstract=2871907

Marieke Bos

Swedish House of Finance - Stockholm School of Economics ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

HOME PAGE: http://www.mariekebos.org

Chloe Le Coq

SITE-Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

HOME PAGE: http://www.hhs.se/SITE/Staff/Pages/ChloeLeCoq.aspxl

Peter Van Santen (Contact Author)

Sveriges Riksbank ( email )

Brunkebergstorg 11
Stockholm, SE-103 37
Sweden
004687870569 (Phone)
00468210531 (Fax)

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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