Hunt Allcott, Microsoft Research & Harvard University

Are High-Interest Loans Predatory? Theory and Evidence from Payday Lending

Abstract

It is often argued that people might take on too much high-cost debt because they have self-control problems or are overoptimistic about how soon they will repay. We measure borrowers' self-control and over optimism using an experiment with a large payday lender. Although the most inexperienced quartile of borrowers underestimate their likelihood of future borrowing, the more experienced three quartiles predict correctly on average. This finding contrasts sharply with priors we elicited from 103 payday lending and behavioral economics experts, who believed that the average borrower would be highly overoptimistic about getting out of debt. Borrowers are willing to pay a significant premium for an experimental incentive to avoid future borrowing, which we show implies that they perceive themselves to be time inconsistent. We use borrowers' predicted behavior and valuation of the experimental incentive to estimate a model of present focus and naivete. We then use the model to study common payday lending regulations. In our model, banning payday loans reduces welfare relative to existing regulation, while limits on repeat borrowing might increase welfare by inducing faster repayment that is more consistent with long-run preferences.

Hunt Allcott is an applied microeconomist who studies topics in behavioral economics, environmental economics, public economics, and industrial organization. He is a Senior Principal Researcher at Microsoft Research, a Visiting Associate Professor of Economics and Law at Harvard University (in 2020-2021), a Research Associate at the National Bureau of Economic Research, and a Co-Editor of the Journal of Public Economics. He is a Scientific Director of ideas42, a think tank that applies insights from psychology and economics to business and policy design problems, an Affiliate of Poverty Action Lab, a network of researchers who use randomized evaluations to answer critical policy questions in the fight against poverty, and a Faculty Affiliate of E2e, a group of economists, engineers, and behavioral scientists focused on evaluating and improving energy efficiency policy. He was a Contributing Author on the Fifth Assessment Report of the Intergovernmental Panel on Climate Change.

He holds a PhD from Harvard University and a BS and MS from Stanford University.

You can read more about Hunt Allcott here

CEBI contact: Christina Gravert