Asymmetric Paternalism

With the growing evidence on behaviors that deviate from the rational-choice model, a discussion on paternalism is taking center stage. As an economist, I am pretty averse to taking choices away from people, but can we have our cake and eat it too? Enter “asymmetric paternalism.”

“A regulation is asymmetrically paternalistic if it creates large benefits for those who make errors, while imposing little or no harm on those who are fully rational..."

writes George Loewenstein and coauthors in “Regulation for Conservatives: Behavioral Economics and the Case for 'Asymmetric Paternalism.” A simple example is arranging the food in a cafeteria with the healthiest foods first. This would increase the consumption of healthy foods, while not limiting access to unhealthy food for those who rationally want to have their cake.

Recent regulatory action involving payday loans would certainly be on the more heavy-handed end of paternalism: More than a dozen states have banned or restricted payday lending. Restrictions on payday lenders go beyond state regulators too. In 2007, Congress limited interest rates payday lenders could charge to military personnel to 36% APR. No lender is willing (or able) to charge so little interest so this effectively eliminated payday loans to the military.

Certainly people use payday loans for different reasons, some perfectly rational, some perhaps not. So what does asymmetric paternalism look like in payday loan regulation? That’s a tough one. The FDIC’s recent restriction on the number of days per year a borrower could be indebted to a payday lender might be viewed as attempting to impose little harm on those who are borrowing 100% rationally while limiting payday loan use for those who are irrational.

As an aside, in the regulatory context, we should also think about where (and if) people will turn for loans if payday loans are not available. I find, not surprisingly, that people who can’t get a payday loan are more likely to borrow at a pawnshop within a day or two. I've also heard anecdotes that loan sharks are popping up outside check-cashing stores to offer people illegal loans in states where payday loans are not available. The one thing that could unequivocally create large benefits to everyone touched by this debate is more research.

Comments

[Jason Kilborn]

You say "Congress limited interest rates payday lenders could charge to military personnel to 36% APR. No lender is willing (or able) to charge so little interest so this effectively eliminated payday loans to the military." WOW! Do you have empirical support for this proposition? I would have thought that a massive scaleback in payday lending to military personnel would have been reported somewhere, but I haven't heard anything. Moreover, Louisiana has a 36% APR limit on rollovers, and their payday loan industry remains quite vibrant (at least I thought it was). Maybe the initial $15-$20 fee (which I gather doesn't count in the 36% APR calculation) is enough to make the business profitable. If 36% APR is too little to make payday lending profitable, that's big news to me--and I'd really like to see the emprical evidence.

[Patches]

What I am seeing locally here Texas is that payday loan “dispensers” are denying all Military personnel Payday loans. They are typically told that due to the passing of “a law” that they can no longer offer payday loans to Military personnel. Of course it’s only a half truth. They (Payday lenders) are only restricted in how much interest they can charge people in the military but are instead denying them outright. I have yet to see the Pawn Shop correlation though. Of course I only see them when they come into bankruptcy.

I don’t think it’s a bad thing. We have a lot of people in the Military here locally. It’s just way to easy to slip up on those things. They do not need their lives to be more complicated than they already are especially if they are two tours into a four tour commitment.

[John Pottow]

Are you libertarian or utilitarian? What if the cost of implementing an asymmetrically paternalistic system is so great it'd be cheaper to implement a blanket traditionally paternalistic one. Then you'd have to gauge the gains vs. the losses of the paternalism. That could come out with net increase in welfare? Who knew you were so rights-protective as an economist?!

[Breezie]

The charges on Cash Advance can add up, if someone doesn’t pay on time. Other than that, it’s a good option for someone that doesn’t want to get caught up with credit cards debts. They can also help in a tight situation, its quick, and most places are open longer hours than banks.

[Breezie]

The charges on Payday loans can add up, if someone doesn’t pay on time. Other than that, it’s a good option for someone that doesn’t want to get caught up with credit cards debts. They can also help in a tight situation, its quick, and most places are open longer hours than banks.