Marieke Bos

The Pawn Industry and Its Customers: The United States and Europe

As humankind’s oldest financial institution, pawnbroking has served the financial needs of low-income families for centuries. Recently, and especially in the last five years, an increasing number of consumers have relied on pawnbrokers to help them meet daily financial needs. Seven percent of all U.S. and four percent of all Swedish households have used pawn credit at one time or another. Despite the general public’s increased interest in the pawn industry, evidenced by the popularity of reality television shows like “Pawn Stars” and “Hard Core Pawn,” economists have paid surprisingly little attention to the pawnbroking industry and pawnshop borrowers. We start by reviewing the history of pawn credit and the sparse economic literature on pawnbroking, and then present unique U.S. transaction data and Swedish register data to, first, show aggregate trends, and, second, shed light on the social and financial background of pawnshop borrowers and their behavior within the pawnbroking industry in both countries. We find that the pawnbroking industry and pawnshop borrowers are unexpectedly similar in the United States and Sweden.

Should defaults be forgotten? Evidence from variation in removal of negative consumer credit information

Practically all industrialized economies restrict the length of time that credit bureaus can retain borrowers’ negative credit information. There is, however, a large variation in the permitted retention times across countries. By exploiting a quasi-experimental variation in this retention time, we investigate what happens when negative information is deleted earlier from credit files. We find that the loss of information led banks to tighten their lending standards significantly as the expected retention time was diminished from on average three-and-a-half to three years exactly. Simultaneously, we find that borrowers who experience this shorter retention time default more frequently. Since borrowers nevertheless obtain more net access to credit and total defaults do not increase overall, we cannot rule out that this reduction in retention time is optimal.

Bad Times, Good Credit

Asymmetric information between lenders and borrowers is understood to be a key friction in credit markets. Can amplified information problems explain why the supply of corporate credit contracts in recessions and crises? Alternatively, asymmetric information may be reduced by economic slowdowns. We test these opposing views of information frictions in the credit market using data on lending from a large bank, through two business cycles. We find that this banks’ ability to sort borrowers by credit quality is best in bad times. This suggests that information frictions are counter-cyclical in corporate credit markets.

Balancing act: new evidence and a discussion of the theory on the rationality and behavioral anomalies of choice in credit markets

An emerging literature explores how people choose between and use forms of consumer credit. In their chapter, Bos, Carter, and Skiba reflect on the existing literature that analyzes the choice between traditional forms of credit and non-traditional forms of credit such as pawnshop loans and payday loans. The authors add to this literature by introducing new data on observed choices of customers switching to pawnshop loans when payday loans are not available. They bring together these facts to discuss the behavioral economics of choice across these credit markets. They outline the relevant behavioral economics theory, which they hope will inform regulators’ choices in governing alterative credit markets.

Economic Scarcity and Consumers’ Credit Choice

This paper documents that increased scarcity right before a payday causally impacts credit choices. Exploiting a transfer system that randomly assigns the number of days between paydays to Swedish social welfare recipients, we find that low educated borrowers behave as if they are more present-biased when making credit choices during days when their budget constraints are exogenously tighter. As a result their default risk and debt servicing cost increase significantly. Access to mainstream credit or liquidity buffers cannot explain our results. Our findings highlight that increased levels of economic scarcity risk to reinforce the conditions of poverty.