|
EconStor >
Federal Reserve Bank of New York >
Staff Reports, Federal Reserve Bank of New York >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/10419/60770
|
| | |
| Title: | | Competition and adverse selection in the small-dollar loan market: Overdraft versus payday credit  |
| Authors: | | Melzer, Brian T. Morgan, Donald P. |
| Issue Date: | | 2009 |
| Series/Report no.: | | Staff Report, Federal Reserve Bank of New York 391 |
| Abstract: | | We find that competition from payday lenders leads depository institutions to raise overdraft fees and reduce the availability of 'free' checking accounts. We attribute this rise in prices partly to adverse selection created by banks' practice of charging a flat fee regardless of the overdraft amount - pricing that favors depositors prone to large overdrafts. Payday credit is priced per dollar borrowed, so when that option is available, depositors prone to small overdrafts switch. That selection works against banks; large overdrafts cost more to supply and, if depositors default, banks lose more, so prices rise. Consistent with this adverse selection hypothesis, we document that the average dollar amount per returned check at banks and other depository institutions increases when depositors have access to payday credit. Our findings illuminate competition and pricing frictions in the large, yet largely unstudied, small-dollar loan market. |
| Subjects: | | Payday credit overdraft credit competition adverse selection |
| JEL: | | G21 G20 D14 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Staff Reports, Federal Reserve Bank of New York
|
| Files in This Item:
| |
|
| No. of Downloads:
| |
| last Month |
last 3 Month |
total |
|
|
|
|
|
| |
| | |
Download bibliographical data as:
BibTeX
|
| |
Share on:http://hdl.handle.net/10419/60770
|
Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.
|