Title: Interest rate caps and implicit collusion: the case of payday lending
Authors: Robert DeYoung; Ronnie J. Phillips
Department of Finance, University of Kansas, Summerfield Hall, 1300 Sunnyside Avenue, Lawrence, KS 66045, USA
Department of Economics, Colorado State University, C306 Clark Building, Fort Collins, CO 80523, USA
Abstract: Payday loans are very expensive forms of credit, and states that permit payday lending typically impose ceilings on loan prices. We test whether and how such constraints influence the pricing behaviour of payday lenders, using data on 35,098 payday loans originated in Colorado between 2000 and 2006. We find that loan prices moved upward toward the legislated price ceiling over time, a pattern that is consistent with implicit collusion facilitated by a pricing focal point. This phenomenon is accompanied by a reduction in competitive rivalry: as average prices approach the ceiling over time, statistical evidence consistent with classical price competition fades, and is replaced by evidence consistent with a variety of strategic pricing.
Keywords: implicit collusion; interest rate caps; loan pricing; payday lending; strategic pricing; price competition; credit.
Int. J. of Banking, Accounting and Finance, 2013 Vol.5, No.1/2, pp.121 - 158
Available online: 07 Dec 2013