Economic Scarcity and Consumers’ Credit Choice
07 December, 2016
by Chloé Le Coq (with Marieke Bos and Peter van Santen), Swedish House of Finance Research Paper
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.
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