Assessing the Impacts of State Regulations on the Usage of Alternative Financial Services

Are regulations on the payday loan effective? Do people switch to other forms of expensive credit such as pawnshop loans because of such regulations? In this study, we aim to find the answers to these two questions through exploring state-level variations in regulations on payday loans and other alternative financial services. Using FDIC’s panel survey data and Google Trends data, we find that although the strict payday loan ban is less effective in the short run due to enforcement issue created by loopholes such as the online payday loans, it is effective in the long run as the law enforcement agency increases enforcement effort. We also find evidence that the regulations on payday loans induce the users of payday loans to switch to pawnshops when we restrict our study to the respondents who use exclusively either payday loans or pawnshops before and after the regulations. Thesis Supervisor: Joseph Farrell Title: Professor of Economics