Cash flow
Do Payday Loans Cause Bankruptcy?
Paige Marta Skiba & Jeremy Tobacman
Journal of Law and Economics, August 2019, Pages 485-519
Abstract:
Payday loans are used by millions of Americans every year despite their annualized interest rates of several hundred percent. We provide new evidence on the consequences of payday borrowing and the determinants of personal bankruptcy. Using an administrative panel data set of loan records in a regression-discontinuity design, we estimate that payday loans increase personal bankruptcy rates by a factor of two. We assess possible mechanisms and find the most support for a novel one: payday loan access appears to induce bankruptcy filings by worsening the cash flow position of the household.
Playing Hide and Seek: How Lenders Respond to Borrower Protection
Youssef Benzarti
NBER Working Paper, October 2019
Abstract:
This paper uses the universe of mortgage contracts to estimate the response of high-interest lenders to borrower protection regulations aimed at simplifying and making loan terms more transparent. Using a quasi-experimental design, we find that lenders substantially reduce interest rates – by an average of 10% – in order to avoid being subject to borrower protection, without reducing amounts lent or the number of loans approved. This finding implies that a substantial number of high-interest lenders prefer to issue obfuscatory mortgage contracts with lower interest rates rather than more transparent and regulated mortgages with higher interest rates.
The Revolving Door and Insurance Solvency Regulation
Ana-Maria Tenekedjieva
University of Chicago Working Paper, November 2019
Abstract:
Financial solvency regulation of the U.S. insurance industry occurs at the state level, and is led by insurance commissioners. Insurance commissioners wield significant discretion over the regulatory process, but their incentives may be affected by post-term job opportunities (“revolving door”). I construct a novel data set of the employment history of insurance commissioners from 2000 to 2018 and find 38% of them work in the insurance industry after their term ends (“post-term revolvers”). Before leaving office, post-term revolvers are laxer financial regulators along several dimensions: they perform fewer financial exams per year, the exams they perform have fewer negative consequences for firms, and post-term revolvers are less likely to respond to insurers’ risk-taking. Post-term revolvers’ behavior responds to changes in incentives. Specifically, commissioners more likely to be post-term revolvers ex ante perform more exams in states where revolving door laws have been tightened. Overall, my results suggest the revolving door induces insurance regulators to be less strict.
Eight Centuries of Global Real Interest Rates, R-G, and the ‘Suprasecular’ Decline, 1311–2018
Paul Schmelzing
Harvard Working Paper, November 2019
Abstract:
With recourse to archival, printed primary, and secondary sources, this paper reconstructs global real interest rates on an annual basis going back to the 14th century, covering 78% of advanced economy GDP over time. I show that across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates have not been “stable”, and that since the major monetary upheavals of the late middle ages, a trend decline between 0.6-1.8bps p.a. has prevailed. A consistent increase in real negative-yielding rates in advanced economies over the same horizon is identified, despite important temporary reversals such as the 17th Century Crisis. Against their long-term context, currently depressed sovereign real rates are in fact converging “back to historical trend” – a trend that makes narratives about a “secular stagnation” environment entirely misleading, and suggests that – irrespective of particular monetary and fiscal responses – real rates could soon enter permanently negative territory. I also posit that the return data here reflects a substantial share of “nonhuman wealth” over time: the resulting R-G series derived from this data show a downward trend over the same timeframe: suggestions about the “virtual stability” of capital returns, and the policy implications advanced by Piketty (2014) are in consequence equally unsubstantiated by the historical record.
Debtor Protection and Business Dynamism
Geraldo Cerqueiro, María Fabiana Penas & Robert Seamans
Journal of Law and Economics, August 2019, Pages 521-549
Abstract:
We study the effect of debtor protection on business dynamism. We find that greater debtor protection, in the form of more lenient personal bankruptcy laws, increases firm entry only in sectors requiring low start-up capital. We also find that debtor protection increases firm exit and job destruction rates among young small firms. This negative effect takes 3 years to materialize and is persistent. Finally, we provide evidence consistent with two mechanisms underlying these changes in business dynamism: a reduction in credit supply and entry of lower-quality firms following increases in debtor protection.
Spending Less After (Seemingly) Bad News
Mark Garmaise, Yaron Levi & Hanno Lustig
Stanford Working Paper, October 2019
Abstract:
We show that household consumption displays excess sensitivity to salient macro-economic news. When the announced local unemployment rate reaches a 12-month maximum, local consumers in that area reduce discretionary spending by 2% relative to consumers in areas with the same macro-economic fundamentals. The consumption of low-income households displays greater excess sensitivity to salience. The decrease in spending is not reversed in subsequent months; instead, negative news persistently reduces future spending for two to four months. Announcements of 12-month unemployment maximums also lead consumers to reduce their credit card repayments by 3.6%.
Social Influence and the Consumer Bankruptcy Decision
Jonathan Fisher
Contemporary Economic Policy, forthcoming
Abstract:
I examine the influence of neighbors on the consumer bankruptcy decision using administrative bankruptcy records linked to the 2000 Decennial Census. Two empirical strategies remove unobserved common factors that affect identification. The first strategy uses small geographical areas to isolate neighborhood effects, and the second strategy identifies the effect using past bankruptcy filers who moved states. The findings from both strategies reinforce each other and confirm the role of social influence on the bankruptcy decision. Having a past bankruptcy filer move into the block from a different state increases the likelihood of filing by 10%.
Winners and losers from supervisory enforcement actions against banks
Raluca Roman
Journal of Corporate Finance, forthcoming
Abstract:
We investigate how supervisory enforcement actions (EAs) against banks affect their business borrowers. We find negative short-term valuation effects of EAs for large relationship borrowers, which are reversed after new loans are granted. Large non-relationship borrowers' valuations are unaffected by EAs, but turn negative after relationships are established with sanctioned banks. Additionally, sanctioned banks appear to offset uncertainty and reputational damage of EAs by improving credit terms and availability for relationship and non-relationship large businesses, but decrease credit availability to small businesses. The small business credit contraction may have significant negative economic consequences due to bank dependency and credit constraints.