July 26, 2013 Financial Products Innovation Fund Working Group Meeting

SHOCK-umentation

Jonathan ZinmanDartmouth College and

IPA’s U.S. Household Finance Initiative

Theories of unproductive consumer borrowing

Temptation Vissing-Jorgensen paper on luxury spending predicting

default Over-optimism about, inattention to, how will

pay back Anecdotal evidence

Price misperceptions Correlation evidence in Stango-Zinman JF

Loss aversion around prior consumption, in face of negative income shock Anecdotal evidence

Theories of “productive” consumer borrowing

“Investment” broadly defined to include job retention, skill-building, health

Evidence from microcredit RCTs consistent with thisMost strikingly Karlan-Zinman RFS on job retention

The 80 in the 80-20 rule

Objective

Lend to the 80

Ration the 20

(or: adjust price per risk)

Basic idea

Shockumentation as a feature of a (small-dollar) consumer loan product

Antecedents

Key Design Issue: Disbursement

Disbursement directly to seller of the investment good?

Or can do without? Copy of invoice? Receipt? Scalable channel: submit by smartphone?

Other Design Issues

Which shocks to lend against?

Shockumentation as requirement, or as price/term concession?