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Jeremy Tobacman's Papers   


  • "Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?" (with Sumit Agarwal and Paige Marta Skiba)
         Abstract: Using a unique dataset matched at the individual level from two administrative sources, we examine household choices between liabilities and assess the informational content of prime and subprime credit scores in the consumer credit market. First, we show that most borrowers from one payday lender who also have a credit card from a major credit card issuer have substantial credit card liquidity on the days they take out their payday loans. This is costly because payday loans have annualized interest rates of at least several hundred percent, though perhaps partly explained by the fact that borrowers have experienced substantial declines in credit card liquidity in the year leading up to the payday loan. Second, we show that FICO scores and Teletrack scores have independent information and are specialized for the types of lending where they are used. Teletrack scores have eight times the predictive power for payday loan default as FICO scores. We also show that prime lenders should value information about their borrowers' subprime activity. Taking out a payday loan predicts nearly a doubling in the probability of serious credit card delinquency over the next year.

  • "Payday Loans, Uncertainty, and Discounting: Explaining Patterns of Borrowing, Repayment, and Default" (with Paige Marta Skiba)
         Abstract: Over nine million American households borrowed on payday loans in 2002, typically paying annualized interest rates above four hundred percent. Using a unique new administrative dataset from a payday lender with two million observations, we seek to account for the prevalence of payday borrowing by estimating a structural dynamic programming model of consumption, saving, payday-loan borrowing, and default on payday loans. The model includes standard features like liquidity constraints and stochastic income, and we also incorporate institutionally-realistic payday loans and generalizations of the discount function. Method of Simulated Moments estimates of the model's key parameters are identified by evidence that the average borrower who eventually defaults first repays or services five payday loans, paying 90% of the loan's principal in interest. Procrastinating on default in this way, we find, is most consistent with partially naive quasi-hyperbolic discounting. We statistically reject the exponential discounting and quasi-hyperbolic discounting null hypotheses in most specifications.

  • "Do Payday Loans Cause Bankruptcy?" (with Paige Marta Skiba)
         Abstract: Despite the prevalence of payday loans, little is known about the effects of access to this form of short-term, high-cost credit. We match individual-level administrative records on payday borrowing to public records on bankruptcy, and we exploit a regression discontinuity to estimate the causal impact of access to payday loans on bankruptcy filings. Though payday loans are small (the typical amount is $300), we find that loan approval for first-time applicants increases the two-year bankruptcy filing rate by 2.48 percentage points. There appear to be two components driving this large effect. First, payday loan applicants are financially stressed. Second, approved applicants borrow repeatedly on payday loans and pawn loans, which carry very high interest rates. For the subsample that identifies our estimates, the cumulative interest burden from payday and pawn loans amounts to roughly 10% of the total liquid debt interest burden at the time of bankruptcy filing.

  • "Estimating Discount Functions with Consumption Choices over the Lifecycle" (with David Laibson and Andrea Repetto), conditionally accepted, American Economic Review
         Abstract: Intertemporal preferences are difficult to measure. We estimate time preferences using a structural buffer stock consumption model and the Method of Simulated Moments. The model includes stochastic labor income, liquidity constraints, child and adult dependents, liquid and illiquid assets, revolving credit, retirement, and discount functions that allow short-run and long-run discount rates to differ. Data on retirement wealth accumulation, credit card borrowing, and consumption-income comovement identify the model. Our benchmark estimates imply a 40% short-term annualized discount rate and a 4.3% long-term annualized discount rate. Almost all specifications reject the restriction to a constant discount rate. Our quantitative results are sensitive to assumptions about the return on illiquid assets and the coefficient of relative risk aversion. When we jointly estimate the coefficient of relative risk aversion and the discount function, the short-term discount rate is 15% and the long-term discount rate is 3.8%.

  • "Discounting and Optimism Equivalences" (with Martin Browning)
         Abstract: Both discounting and optimism can induce impatient behavior in the present. This paper derives equivalences between classes of discount functions and classes of (possibly erroneous) sets of beliefs in a standard intertemporal choice context. We find that strong assumptions about beliefs are generically necessary for identification of the discount function.

  • "Barriers to Household Risk Management: Evidence from India" (with Shawn Cole, Xavier Gine, Petia Topalova, Robert Townsend, and James Vickery)
         Abstract: Financial engineering offers the potential to significantly reduce consumption fluctuations faced by individuals, households, and firms. Yet much of this promise remains unrealized. In this paper, we study the adoption of an innovative rainfall insurance product designed to compensate low-income Indian farmers in case of deficient rainfall during the primary monsoon season. We first document relatively low levels of adoption of this new risk management technology: only 5-10% of households purchase insurance, even though rainfall variability is overwhelmingly cited by households as the most important risk they face. We then conduct a series of randomized field experiments to test theoretical predictions of why adoption may be low. Insurance purchase is sensitive to price, with an estimated extensive price elasticity of demand between -0.66 and -0.88. Credit constraints, identified through the provision of random liquidity shocks, are a key barrier to participation, a result also consistent with household self-reports. Several experiments find an important role for trust in insurance participation. We find mixed evidence that subtle psychological manipulations affect purchase, and no evidence that modest amounts of financial education changes participation decisions. Based on our experimental results, we suggest preliminary lessons for improving the design of household risk management contracts.

  • "The Profitability of Payday Lending" (with Paige Marta Skiba)
         Abstract: Payday loans provide short-term liquidity to consumers. This paper studies the profitability of payday lending using standard financial data from CRSP and SEC filings and loan-level data from a payday lender. Despite charging APRs of many thousand percent, we find lenders' firm-level returns differ little from typical financial returns. The data are consistent with an interpretation that payday lenders face high per-loan and per-store fixed costs in a competitive market.

  • "The Partial Naivete Euler Equation"
         Abstract: This short paper extends the Harris-Laibson (2001) heuristic derivation of the Hyperbolic Euler Equation to the partial naivete setting. The result is used to show that if the coefficient of relative risk aversion exceeds one, saving is increasing in sophistication.

  • "Discounting, Credit Constraints, and Wealth Inequality"
         Abstract: This paper studies the implications of quasi-hyperbolic discounting models for wealth inequality. The Hyperbolic Euler Equation implies that quasi-hyperbolic discounters have effective discount factors that are decreasing in the next period's MPC. This endogenously induces heterogeneity in savings rates that correlates positively with wealth. A theoretical model formalizes this idea, and numerical examples suggest the effect may be quantitatively large. Simulations based on a lifecycle model calibrated to typical US pre-retirement wealth levels show that the quasi-hyperbolic model predicts age-specific wealth Ginis 3%-7% higher than the exponential model. The effect may be mitigated by increasing access to credit, but overall welfare effects of increasing credit access depend on the distribution of endowments.

  • "A Debt Puzzle" (with David Laibson and Andrea Repetto), in Knowledge, Information, and Expectations in Modern Economics: In Honor of Edmund S. Phelps, Eds. Philippe Aghion, Roman Frydman, Joseph Stiglitz, and Michael Woodford, Princeton University Press, 2003.

  • "The Hyperbolic Buffer Stock Model: Calibration, Simulation, and Empirical Evaluation" (with George-Marios Angeletos, David Laibson, Andrea Repetto, and Stephen Weinberg), Journal of Economic Perspectives, 15(3), Summer 2001, 47-68.

  • "Self-Control and Saving for Retirement" (with David Laibson and Andrea Repetto), Brookings Papers on Economic Activity, 1998:1, 91-172.

  • "Cooperative Effect of Calcium Binding to Adjacent Troponin Molecules on the Thin Filament-Myosin Subfragment 1 MgATPase Rate" (with Carol Butters and Larry Tobacman), Journal of Biological Chemistry, 272:20, May 16, 1997, pp. 13196-13202.

Work in Progress

  • "The Effect of the 2001 Tax Rebates on Crime"

  • "Financial Smoking Guns: High-Frequency Links Between Transactions and Crime" (with Sumit Agarwal and Paige Marta Skiba)

  • "Who Eats Prestige? Social Approval in the Labor Market" (with Mikhail Drugov)

  • "Experimental Tests of Self-Control and Temptation" (with Charles Efferson and Ernst Fehr)