CREDIT AND SPEEDY PAYDAY LOANS FOR CONSUMERS

consumer loansThe existence of borrowing constraints in the market for consumer loans has important implications at both the micro and macro levels. At the micro level, credit constraints can affect both the intra- and intertemporal allocations of resources and have important consequences for the effects of various policy measures. At the macro level, liquidity constraints, as borrowing restrictions are often characterized, have been invoked to explain the observed correlation between expected consumption and income growth, and the rejection of the permanent income hypothesis. Moreover, the possibility that individual agents have limited means of smoothing consumption over time has been for a long time considered as a justification for a Keynesian consumption function (see for instance Flemming, 1973). But despite the importance of the topic, and the substantial amount of theoretical and empirical research that has been devoted to it, there is still no conclusive evidence on the significance of credit rationing in consumer loan markets.

A potential explanation for this lack of consensus is the fact that most empirical work on the subject has utilized only consumption data, and not data on loans. The majority of this work has been framed in terms of a test of the life cycle – permanent income hypothesis, focusing on the excess sensitivity of consumption to expected labor income (see, for example, Hall and Mishkin (1982), Hansen and Singleton (1982, 1983), Altonji and Siow (1987), Zeldes (1989), Runkle (1991)). The problem with this approach is that the interpretation of the results critically depends on explicit or implicit assumptions about the utility function. In particular, the inference of the existence of credit constraints often rests on the assumption of separability between consumption and leisure, which has been empirically rejected (Browning and Meghir (1991)).

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