Economic Scarcity and Consumers’ Credit Choice

This paper documents that increased scarcity right before a payday causally impacts credit choices. Exploiting a transfer system that randomly assigns the number of days between paydays to Swedish social welfare recipients, we find that low-educated borrowers behave as if they are more present-biased when making credit choices during days when their budget constraints are exogenously tighter. As a result, their default risk and debt-servicing cost increase significantly. Access to mainstream credit or buffer stocks cannot explain our results. Our findings highlight that increased levels of economic scarcity risk reinforcing the conditions of poverty.

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