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Scarcity and consumers’ credit choices
- Source :
- Theory and Decision, 92(1), 105-139. SPRINGER
- Publication Year :
- 2022
-
Abstract
- We study the effect of scarcity on decision making by low income Swedes. We exploit the random assignment of welfare payments to study their borrowing decisions within the pawn and mainstream credit market. We document that higher educated borrowers borrow less frequently and choose lower loan to value ratios when their budget constraints are exogenously tighter. In contrast, low-educated borrowers do not respond to temporary elevated levels of scarcity. This lack of response translates into a significantly higher probability to default and an 11.6% increase in borrowing cost. We show that a difference in access to liquidity and/or buffer stocks cannot explain our results. Instead a framework, where the awareness of self-control problems is positively correlated with education can explain that high-educated consumers choose a lower LTV as a commitment device to increase their likelihood to repay. Analogously, low-educated with less awareness of their future self-control problems, do not tie themselves to the mast and thus ignore the consequences of their credit decisions when focusing on solving acute liquidity problems. Our findings highlight that increased levels of scarcity risk reinforcing the conditions of poverty through overborrowing.
- Subjects :
- Commitment device
media_common.quotation_subject
05 social sciences
General Social Sciences
General Decision Sciences
Monetary economics
Payment
Loan-to-value ratio
Buffer stock scheme
Computer Science Applications
Market liquidity
Scarcity
Arts and Humanities (miscellaneous)
0502 economics and business
Developmental and Educational Psychology
Economics
Bond market
050206 economic theory
050207 economics
General Economics, Econometrics and Finance
Applied Psychology
Budget constraint
media_common
Subjects
Details
- Language :
- English
- ISSN :
- 00405833
- Database :
- OpenAIRE
- Journal :
- Theory and Decision, 92(1), 105-139. SPRINGER
- Accession number :
- edsair.doi.dedup.....d8be2db51b5669230526896e52940bcc