Liquidity Shocks and the Demand for Pawn Loans

Utilizing the proprietary data of a company operating 10 pawnshops throughout Kentucky and Ohio, and exploiting the randomized variation of the Economic Stimulus Payments of 2008, this paper studies the effect of positive liquidity shocks on pawn loan utilization. We uncover a statistically significant 67% decrease in pawn loan utilization in the week following receipt of ESP checks. However, in the year following receipt of the ESP via check or direct deposit, a statistically significant increase of 20% and 138% respectively in pawn loan utilization occurs. A distributed lag regression model corroborates this effect— an initial decrease, but then dominating increase in pawn loan utilization following receipt of an ESP. This propensity of short term, transitory changes in income to drastically affect the borrowing patterns of households proves difficult to reconcile with Permanent Income/Life Cycle Hypothesis.