Economic Scarcity and Consumers’ Credit Choice
Sveriges Riksbank Working Paper Series No. 329
52 Pages Posted: 7 Dec 2016 Last revised: 13 Jan 2017
Date Written: October 1, 2016
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
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