What happens when payday borrowers are cut off from payday lending ? A natural experiment ∗

This paper examines the impact of restricting credit to payday borrowers. Using administrative banking data from over fifteen thousand online payday loan users, I exploit a natural experiment surrounding a 2013 U.S. Department of Justice initiative known as Operation Choke Point (OCP), which unexpectedly shut down dozens of online payday lenders. Using a difference in differences framework, I find a persistent reduction in payday borrowing of treated households, those with a pre-existing relationship with a lender that is shut down. Relative to control households, treated households reduce expenditures on payday interest by $81 per month and reduce the frequency of financial distress by 5%. A cross-sectional analysis reveals that the benefits of reduced payday loan access vary dramatically across groups. Both heavy pre-treatment borrowers and those who borrowed in the month preceding Operation Choke Point experience the largest benefits in terms of reduced financial distress and increased consumption, and these benefits increase in magnitude over time. In contrast, light pre-treatment borrowers experience no change in financial distress or consumption. Using an instrumental variables approach, I estimate that a $1,000 decrease in borrowing will result in a$1,429 reduction in loan repayments, 0.2 fewer instances of financial distress, and a $316 increase in consumption. ∗I thank my dissertation committee, René Stulz (Chair), Zahi Ben-David, Berk Sensoy, and Jonathan Parker for helpful discussion and suggestions. I am grateful for comments by Hoonsuk Park, Sehoon Kim, and Matthew Wynter. I am also grateful for the financial support of the NBER Household Finance Grant. †Finance Ph.D. Candidate. [email protected].