Misfortune and Mistake: The Financial Conditions and Decision-Making Ability of High-Cost Loan Borrowers

71 Pages Posted: 16 Jan 2020 Last revised: 10 Jun 2022

See all articles by Leandro Carvalho

Leandro Carvalho

Center for Economic and Social Research (CESR); University of Southern California - Department of Economics

Arna Olafsson

Copenhagen Business School

Dan Silverman

Arizona State University (ASU) - W.P. Carey School of Business

Date Written: September 2019

Abstract

The appropriateness of many high-cost loan regulations depends on whether demand is driven by financial conditions (“misfortunes”) or imperfect decisions (“mistakes”). Bank records from Iceland show borrowers have especially low liquidity just before getting a loan, but their spending is not especially low in the days before the loan arrives and some spend a substantial fraction of the loans on seemingly inessential items. Borrowers exhibit lower decision-making ability (DMA) in linked choice experiments: 45% of loan dollars go to the bottom 20% of the DMA distribution. Standard determinants of demand do not explain this relationship, which is also mirrored by the relationship between DMA and an unambiguous “mistake.” Both “misfortune” and “mistake” thus appear to drive demand.

Suggested Citation

Carvalho, Leandro and Olafsson, Arna and Silverman, Dan, Misfortune and Mistake: The Financial Conditions and Decision-Making Ability of High-Cost Loan Borrowers (September 2019). NBER Working Paper No. w26328, Available at SSRN: https://ssrn.com/abstract=3519734

Leandro Carvalho (Contact Author)

Center for Economic and Social Research (CESR) ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States

Arna Olafsson

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Dan Silverman

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

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