The Welfare Effects of Law Enforcement in the Illegal Money Lending Market

98 Pages Posted: 4 Feb 2022 Last revised: 27 May 2022

See all articles by Kaiwen Leong

Kaiwen Leong

Nanyang Technological University (NTU)

Huailu Li

Fudan University, School of Economics

Nicola Pavanini

Tilburg University

Christoph Walsh

Tilburg University - Department of Econometrics & Operations Research; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: December 2021

Abstract

We estimate a structural model of borrowing and lending in the illegal money lending market using a unique panel survey of 1,090 borrowers taking out 11,032 loans from loan sharks. We use the model to evaluate the welfare effects of alternative law enforcement strategies. We find that a large enforcement crackdown that occurred during our sample period raised interest rates, lowered the volume of loans, increased the lenders' unit cost of harassment, decreased lender profits, and decreased borrower welfare. We compare this strategy to targeting borrowers and find that targeting medium-performing borrowers is the most effective at lowering lender profits.

Keywords: crime, Illegal Moneylending, law enforcement, Loan Sharks

JEL Classification: G51, K42

Suggested Citation

Leong, Kaiwen and Li, Huailu and Pavanini, Nicola and Walsh, Christoph, The Welfare Effects of Law Enforcement in the Illegal Money Lending Market (December 2021). CEPR Discussion Paper No. DP16779, Available at SSRN: https://ssrn.com/abstract=4026644

Kaiwen Leong (Contact Author)

Nanyang Technological University (NTU) ( email )

S3 B2-A28 Nanyang Avenue
Singapore, 639798
Singapore

Huailu Li

Fudan University, School of Economics ( email )

Han Dan Lu 220 Hao, 11 Hao Lou, 128 Shi
Shanghai, Shanghai 200433
China

Nicola Pavanini

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

Christoph Walsh

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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