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Welfare Economics and Consumer Credit Paper

posted by Alan White

I have just posted a working paper on the welfare economics of microcredit and payday lending.  The paper tries to address some of the questions raised by, among others, Jim Hawkins, discussed in previous posts here and here.  Post-crisis consumer credit regulation, it seems to me, will have to proceed from norms other than revealed preferences utilitarianism.  Accepted criteria for judging the success or failure of  future regulation will be an essential first step in elaborating a fact-based regime of consumer credit rules.


Where'd Lubben go? This blog is starting to suck. All payday loans all the time.

I think you (Professor White, not the above commenter) are asking the right questions and the little summary at the link demonstrates a great deal of deep thought which yet has been condensed pithily. I have two and a half comments. First the phrase your blurb uses "at a reasonable cost" tends to permit a great deal of normative baggage to be smuggled in. Second, as your reference to revealed preference utilitarianism implies, but I think should be made more explicit, "how would a [nonpoor] outsider know what is best for a particular [poor] person and isn't it ultimately that [poor] person's choice". Put in a slightly different way (the half comment), in a republic, and to avoid totalitarian tendencies, laws have to be fashioned on the assumption that citizens above some threshold get to make their own choice and have to live with the consequences.

I think the latter point can be rebutted if you have a great deal of very consistent data that shows "no, people who get this product don't understand what they are getting", and/or, "it rarely works for the borrower". (Exactly what "a great deal of very consistent data" means is beyond the scope of a comment). And I assume that is where your paper takes the reader. So I look forward to reading it someday.

The Smart Money magazine has some interesting insights into this, and comments on what the unintended consequences will be of new credit card regulations. Like most things, only time will tell.

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