Shaming Microloan Delinquents: Evidence from a Field Experiment in China

Moral Incentives in Credit Card Debt Repayment: Evidence from a Field Experiment

We study the role of morality in debt repayment, using an experiment with the credit card customers of a large Islamic bank in Indonesia. In our main treatment, clients receive a text message stating that “non-repayment of debts by someone who is able to repay is an injustice.” This moral appeal decreases delinquency by 4.4 percentage points from a baseline of 66 percent and reduces default among customers with the highest ex ante credit risk. Additional treatments help benchmark the effects against direct financial incentives and rule out competing explanations, such as reminder effects, priming religion, and provision of new information.

Debt Traps? Market Vendors and Moneylender Debt in India and the Philippines

A debt trap occurs when someone takes on a high-interest-rate loan and is barely able to pay back the interest, and thus perpetually finds themselves in debt (often by refinancing). Studying such practices is important for understanding financial decision-making of households in dire circumstances, and also for setting appropriate consumer protection policies. We conduct a simple experiment in three sites in which we paid off high-interest moneylender debt of individuals. Most borrowers returned to debt within six weeks. One to two years after intervention, treatment individuals were borrowing at the same rate as control households.

Minimum Required Payment and Supplemental Information Disclosure Effects on Consumer Debt Repayment Decisions

Repayment decisions—how much of the loan to repay and when to make the payments—directly influence consumer debt levels. The authors examine how minimum required payment policy and loan information disclosed to consumers influence repayment decisions. They find that while presenting minimum required payment information has a negative impact on repayment decisions, increasing the minimum required level has a positive effect on repayment for most consumers. Experimental evidence from U.S. consumers shows that consumers’ propensity to pay the minimum required each month moderates these effects; U.K. credit card field data indicate that borrowers’ credit limit and balance due also moderate these effects. However, increasing the minimum level is unlikely to completely eliminate the negative effect of presenting minimum payment information. In addition, disclosing supplemental information, such as future interest cost and time needed to repay the loan, does not reduce the negative effects of including minimum payment information and has no substantial positive effect on repayments. This research offers new insights into the debt repayment process and has implications for consumers, lenders, and public policy.

Information disclosure and credit card repayments: evidence from Malaysia

Purpose This study analyzes the role of information disclosure in influencing credit card repayments by focusing on three intervention methods for improving repayment decisions among credit cardholders. Design/methodology/approach This study uses the survey method to collect data. Four questionnaires are designed to identify which types of disclosure elicit better repayment decisions among credit cardholders. The participants were approached using the mall intercept method, and a total of 1,775 responses were obtained. Findings Estimations using means comparison tests show that not providing minimum payment information improves repayments. The expected benefits are not delivered by the provision of higher minimum payment information or additional information that highlights the negative effects of making the minimum repayment only. Further analysis using logit estimation reconfirms the benefit of not providing minimum payment information. However, when such information is given, low minimum payment information elicits better repayment decisions than high minimum payment information or additional information. Repayment worsens under the additional information condition compared to the high minimum payment condition. Research limitations/implications The findings of this study have a bearing on the decisions of policy makers, credit card issuers and consumers. Originality/value This paper clarifies the role of information in improving debt repayment decisions.

Is Digital Credit Filling a Hole or Digging a Hole? Evidence from Malawi

Abstract Digital credit has expanded rapidly in Africa, with opaque loan terms amidst low consumer financial literacy. Rich data from Malawi shows substantial demand for a digital loan with a base interest rate of 10% over 15 days, yet most borrowers are not aware of loan terms, repay late and incur substantial late fees. Regression discontinuity analyses show no evidence that access to small digital loans harms consumers’ perceived well-being. A short, randomised, phone-based financial literacy intervention improved knowledge, but did not increase timely loan repayment and modestly increased loan demand, ultimately increasing the likelihood of ever defaulting.

Information Disclosure, Cognitive Biases, and Payday Borrowing

ABSTRACT Can psychology‐guided information disclosure induce borrowers to lower their use of high‐cost debt? In a field experiment at payday stores, we find that information that makes people think less narrowly (over time) about finance costs results in less borrowing. In particular, reinforcing the adding‐up dollar fees incurred when rolling over loans reduces the take‐up of future payday loans by 11% in the subsequent 4 months. Although we remain agnostic as to the overall sufficiency of better disclosure policy to “remedy” payday borrowing, we cast the 11% reduction in borrowing in light of the relative low cost of this policy.

Are Information Disclosures Effective? Evidence from the Credit Card Market

Consumer protection in financial markets in the form of information disclosure is high on government agendas, even though there is little evidence of its effectiveness. We implement a randomized control trial in the credit card market for a large population of indebted cardholders and measure the impact of Truth-in-Lending-Act-type disclosures, de-biasing warning messages and social comparison information on default, indebtedness, account closings, and credit scores. We conduct extensive external validity exercises in several banks, with different disclosures, and with actual policy mandates. We find that providing salient interest rate disclosures had no effects, while comparisons and de-biasing messages had only modest effects at best.

Reading the Fine Print: Information Disclosure in the Brazilian Credit Card Market

Consumer credit regulations usually require that lenders disclose interest rates. However, in the absence of specific prominence requirements, lenders can conceal the interest rate in the fine print while still complying with the law. I examine the effect of such a strategy using a field experiment in Brazil in which a credit card company offered their clients payment plans to pay off their balances. Using randomized contract interest rates and the degree of rate disclosure, I show that most clients are rate sensitive, whether or not rates are prominently disclosed. The elasticity of payment plan enrollment with respect to the interest rate ranges from −0.711 to −0.880. High-risk clients are an exception; these clients are rate sensitive only when disclosure is prominent. I also show that clients are influenced by nudges that favor longer-term contracts. Conditional on enrollment, the proportion of clients who choose a longer-term contract is 40 percentage points higher when a longer-term contract is featured in the advertisement layout. This effect, however, is weaker when stakes are higher. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2015.2281 . This paper was accepted by Wei Jiang, finance.

An Empirical Analysis of Personal Bankruptcy and Delinquency

Abstract. This article uses a new dataset of credit card accounts to analyze credit card delinquency, personal bankruptcy, and the stability of credit risk

Prosocial Compliance in P2P Lending: A Natural Field Experiment

We implement behavioral mechanisms in a natural field experiment to increase loan repayment rates on a peer-to-peer (P2P) lending website. The results show that text message reminders that convey lenders’ positive expectations considerably increase the likelihood that borrowers will repay their loans, whereas reminders emphasizing the adverse consequences of failure to repay loans do not have enduring effects. Our experiment results in an increase in loan repayments in the sample period. In addition, our reminders are cost-free to implement, showing the potential importance of such interventions in enhancing prosocial compliance in P2P lending. This paper was accepted by John List, behavioral economics.

Do Local Capital Market Conditions Affect Consumers’ Borrowing Decisions?

This paper uses detailed data from an online peer-to-peer lending intermediary to test whether local access to finance affects consumers’ willingness to pay for loans. After controlling for local economic conditions and borrower credit quality, we find that borrowers who reside in areas with good access to bank finance request loans with lower interest rates. This effect is stronger for borrowers with poor credit and those seeking small loans, suggesting that local access to finance is more important for marginal borrowers. Overall, our findings shed light on how consumers substitute between alternative sources of finance. This paper was accepted by Wei Jiang, finance.

Do Nudges Reduce Borrowing and Consumer Confusion in the Credit Card Market?

We study nudges that turn out to have precise null effects in reducing long‐run credit card debt. We test nudges across two field experiments covering 183,441 UK cardholders. Our first experiment studies nudges added to monthly credit card statements. Our second experiment studies letters and email nudges (separate from monthly statements) sent to cardholders who signed up to automatically pay the minimum required payment. In a follow‐up survey to our second experiment, we find that 96% of respondents underestimate the time it would take to fully repay a debt if the cardholder made only the minimum required payment. The nudges reduce this confusion, but underestimation remains overwhelmingly common.

Debt literacy, financial experiences, and overindebtedness

We analyze a national sample of Americans with respect to their debt literacy, financial experiences, and their judgments about the extent of their indebtedness. Debt literacy is a component of broader financial understanding that measures knowledge about debt and self-assessed financial knowledge. Financial experiences are the participants’ reported experiences with traditional borrowing, alternative borrowing, and investing. Overindebtedness is a self-reported measure. Debt literacy is low, with only about one-third of the population grasping the basics of interest compounding. Even after controlling for demographics, we find a relationship between debt literacy and both financial experiences and debt loads. Individuals with lower levels of debt literacy tend to transact in high-cost manners, incurring higher fees and using high-cost borrowing. We provide a rough estimate of the national implications of debt ignorance on credit card costs by consumers. Less knowledgeable individuals also report that their debt loads are excessive or that they are unable to judge their debt position.

The Debt Payment Puzzle: An Experimental Investigation

Why do borrowing individuals fail to repay their debt optimally? We design a diagnostic laboratory experiment where we rule out selection into debt and other co

Information Salience and Mispricing in Housing

Making the purchase price fully salient to consumers has been shown to affect demand and equilibrium prices in various markets. Using a setting where part of the home acquisition price is in the form of nonsalient debt, we show this can happen in housing—a market where a typical household makes its largest acquisition. A regulation that made the debt and the total price salient for homebuyers eliminated a large mispricing caused by consumers’ inattention to the debt before the regulation. An average homebuyer would lose about $13,300 by acquiring a dwelling with one-standard deviation ($51,000)-higher debt, but this is nearly eliminated after the regulation. To shed light on the underlying channels, we use administrative data and show that young, financially inexperienced, and first-time homebuyers used to overpay the most. The results are not driven by rational channels based on liquidity constraints and adverse selection. Our findings imply that making all-inclusive house price and mortgage features salient at the time of advertising the sale can help avoid unintentional borrowing. This paper was accepted by David Simchi-Levi, finance. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2021.4253 .

Payment method and perceptions of ownership

How consumers pay influences how they feel about a transaction. In particular, paying by card has been argued to have an effect on the perception of cost, making it less salient and painful. We propose and show that payment method also influences how consumers feel about the acquired good. Specifically, we focus on effects of the payment method on psychological ownership, i.e., the perception of an object as “mine.” We propose that cash payment results in stronger psychological ownership because it influences the extent of perceived investment in an object. We provide evidence for the proposed effect from field and laboratory settings. Results of a longitudinal exit survey and an experiment show that cash payers report higher levels of immediate psychological ownership than card payers. However, this effect seems to depend on the meanings associated with a payment method. Asian students (who associate credit card payment with investment and debt) do not exhibit this effect. Moreover, the initial boost in psychological ownership seems to be comparably short-lived. While those paying in cash experience no further increase in psychological ownership over time, those paying by card do.