Topics: Loan, Payday loan, Debt Pages: 31 (8983 words) Published: August 21, 2013




Pawnbroking is the oldest source of credit.1 There is growing public interest in day-to-day pawnbroking operations, as evidenced by the popularity of reality shows such as “Pawn Stars” and “Hardcore Pawn.”2 Television viewers’ curiosity about an old credit institution may be due to the fact that 7% of all U.S. households have used pawn credit.3 Although pawnshops predate biblical times, researchers know surprisingly little about this ancient form of banking and its customers.4 We fill this gap by documenting detailed information on pawnshop loan repayment and default, and by discussing how pawnshop borrowers’ behavior is consistent with various behavioral economics phenomena. Pawnshop loans are small, short-term, collateralized loans typically used by low-income consumers. The borrower leaves a possession, or “pledge,” as collateral in exchange for a loan, typically of $75–$100.5 Interest rates vary by state and range from 2                                                              Assistant Professor, Office of Economic and Manpower Analysis, United States Military Academy. The views expressed in this paper do not necessarily represent those of the United States Military Academy, the United States Army, or the Department of Defense. ** Associate Professor of Law, Vanderbilt University Law School. We would like to thank Margaret Blair, Anna Skiba-Crafts and Kip Viscusi for valuable feedback. 1 JOHN P. CASKEY, FRINGE BANKING: CHECK CASHING OUTLETS, PAWNSHOPS, AND THE POOR 13 (1994). 2 Pawn Stars, THE HISTORY CHANNEL, pawn-stars (last visited Nov. 19, 2012); Hardcore Pawn, TRUTV, (last visited Nov. 19, 2012). 3 Marieke Bos, Susan Payne Carter & Paige Marta Skiba, The Pawn Industry and its Customers: The United States and Europe 1 (Vanderbilt Univ. Law and Econ. Research Paper Series, Paper No. 12–26, 2012), available at 4 Id. 5 Customers can also sell items outright to the pawnshop, a practice we do not study here. *




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  to 25%.6 If the borrower does not return to repay the principal plus interest after the maturation date (typically loans last 30–90 days), the pledge is forfeited and resold by the pawnbroker. Just about anyone can borrow on a pawn loan. No bank account, job, or credit check is required—just the collateral and a valid photo ID. We are able to study pawnshop-borrowing behavior in depth using a unique transaction dataset from a lender in Texas with 103 stores in 37 different cities across the state. Our dataset comes from “pawnslips,” which are filled out by the pawnbroker at the time of the transaction and include information on the collateral or “pledge,” start date and due date, repayment outcomes, and borrower demographic characteristics. We study the nature of the collateralized pledge separately, distinguishing items that might have intrinsic value to the owner that goes beyond the dollar value of the item, i.e., sentimental value. We find that borrowers are more likely to return to repay their pawnshop loan when they have pawned a sentimental item, such as a piece of jewelry. We discuss potential behavioral economic explanations and rational economic reasons for this behavior below. These issues have gone unexplored in the sparse literature on pawnshop lending. The growing body of work on other forms of what is often referred to as “fringe banking” makes the persistent lack of literature on pawnshops especially surprising.7 Numerous papers study consumer borrowing behavior and test the consequences of various other types of subprime credit, including payday loans, subprime...
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