Less Mainstream Credit,More Payday Borrowing? Evidence from Debt Collection Restrictions |
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| Authors: | JULIA FONSECA |
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| Institution: | Julia Fonseca is at the University of Illinois at Urbana-Champaign. I am grateful to Atif Mian, Motohiro Yogo, Mark Aguiar, Will Dobbie, and Adrien Matray for their continued guidance and support and to Basit Zafar for contributing to an early version of this paper. I would also like to thank Amit Seru (the Editor), an anonymous Associate Editor, and two anonymous referees for suggestions that greatly improved this paper, as well as Nathan Blascak, Marco Bonomo, Jessica Brown, Meta Brown, Sylvain Catherine, Mariam Farboodi, Fabio Franch, Paul Goldsmith-Pinkham, Andrew Haughwout, Greg Kaplan, Jakub Kastl, Donghoon Lee, Jialan Wang, and seminar participants at the WEIA and the Brazilian Finance Association annual meetings, Princeton, the New York Fed, and Wharton for thoughtful comments. I also thank Cathleen Kelmar for assistance with Experian data and Jialan Wang for help in building the Gies Consumer and small business Credit Panel. Katherine Strair and Sirui Qiu provided excellent research assistance. A previous version of this work was titled “Access to Credit and Financial Health: Evaluating the Impact of Debt Collection.” I have read The Journal of Finance disclosure policy and have no conflicts of interest to disclose. |
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| Abstract: | Governments regulate debt collectors to protect consumers from predatory practices. These restrictions may lower repayment, reducing the supply of mainstream credit and increasing demand for alternative credit. Using individual credit record data and a difference-in-differences design comparing consumers in states that tighten restrictions on debt collection to those in neighboring states that do not, I find that restricting collections reduces access to mainstream credit and increases payday borrowing. These findings provide new evidence of substitution between alternative and mainstream credit and point to a trade-off between shielding consumers from certain collection practices and pushing them into higher cost payday lending markets. |
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