Archive for September 12th, 2023

FinTech and Banks: Strategic Partnerships That Circumvent State Usury Laws

September 12, 2023

Fascinating paper on how banks and fintechs partner to circumvent ususry laws in US states:

Previous research has found evidence suggesting that financial technology (FinTech) lenders seek out opportunities in markets that have been underserved by mainstream banks. The research focuses primarily on the effect of bank market structure, limited income, and economic hardship in attracting FinTech companies to underserved markets.

This paper expands the scope of FinTech research by investigating the role of interest rate regulation of consumer credit and institutional risk segmentation in FinTech lenders’ efforts to solicit new customers in the personal loan market. We find that strategic partnerships between FinTech companies and specialist banks target marginal-risk, near-prime, and low-prime consumers for credit card and other debt consolidation loans.

These FinTech-bank partnerships especially target marginal consumers in states with low interest rate ceilings. Mainstream banks largely avoid higher-risk consumers, and low rate ceilings inhibit consumer finance company lending, which historically has been the major source of personal loans for higher risk consumers and may compete with banks at the margin. In partnering with the specialist banks, the FinTech lenders are able to take advantage of federal preemptions from state rate ceilings to lend profitably to higher-risk consumers in states with low rate ceilings to compete in these markets.

 

Posted in Academic research & research papers, Central Banks / Monetary Policy, Economics - macro, micro etc, Financial Markets/ Finance | 1 Comment »

The Rise and Fall of Company Towns: They’re long gone, but they have much to tell about America’s economic history

September 12, 2023

Aayush Singh of Richmond Fed discusses this interesting aspects of US economic history:

In the heart of Appalachia, just up the road from vast forestry and national parks, lies the town of Gary, W.Va. Built at the turn of the 20th century, Gary and its surrounding region was blessed by geography; the town sat on valuable coal fields and was on the route of a major rail line. Its creation was no accident: U.S. Steel, the brainchild of J.P. Morgan and Andrew Carnegie, needed the coal in the area to supply its blast furnaces. The gargantuan corporation owned and operated the city — it was named after Judge Elbert Gary, U.S. Steel’s chairman of the board — and it was the typical company town. The company owned the factory, the houses, the schools, and the government.

For a while, business was booming. The area was once so prosperous that in the early 1900s, the neighboring town of Bramwell had the highest per capita income in the United States. Fourteen millionaires reportedly lived there, building lavish mansions that were a testament to the fact that coal was king.

But by the midway point of the century, things had taken a dramatic turn. Employment fell, and Gary had become such a symbol of blight that then-Senator John F. Kennedy visited the town during his presidential campaign, vowing that help was on the way. Once inaugurated, Kennedy’s first executive order established the modern food stamp program, and its first recipients were residents of McDowell County, home to Gary.

The rise and fall of Gary — and that of company towns across the country — mirrors the arc of the nation’s economy. From the textile mills of the early 1800s to the coal mines of the 20th century to the manufacturing hubs that defined America’s industrial prowess, the story of the United States can be told through the company town. It is a tale of abundance and abandonment, boom and bust, plenty and poverty.

Posted in Academic research & research papers, Economics - macro, micro etc, Growth and development | Leave a Comment »

The Digital Welfare of Nations: New Measures of Welfare Gains and Inequality

September 12, 2023

Group of researchers (Erik Brynjolfsson, Avinash Collis, Asad Liaqat, Daley Kutzman, Haritz Garro, Daniel Deisenroth, Nils Wernerfelt & Jae Joon Lee) analyse the impact of digital goods and services on the economy:

To better understand the welfare effects of digital goods, new metrics are needed to complement existing production-based metrics such as GDP and productivity (Masood, 2022).2 Recent research has proposed new ways of directly measuring consumer surplus from digital goods using massive online choice experiments (Brynjolfsson et al., 2019a; Brynjolfsson et al., 2019b). However, existing research in this area has only looked at a select few regions and goods using convenience samples that were not representative of the population of digital users.

In this paper, we conduct large-scale incentivized choice experiments involving nearly 40,000 representative users of the Facebook digital service in 13 countries to estimate the welfare gains generated by 10 popular digital goods. While previous research looks at specific digital goods in a single country using smaller non-representative samples (Allcott et al., 2020; Brynjolfsson et al., 2019a), the scale and scope of our sample enable us to estimate valuations for ten leading digital goods with sufficient precision to compare welfare gains from digitization across countries. Similar contingent valuation methods have been used in the past to value non-market goods, including environmental goods (Bishop et al., 2017) and accepted as evidence in legal cases (Lowensohn, 2012)

Findings:

Digital goods can generate large benefits for consumers, but these benefits are largely unmeasured in the national accounts, including GDP and productivity. In this paper, we measure welfare gains from 10 popular digital goods across 13 countries by conducting large-scale incentivized online choice experiments on representative samples of nearly 40,000 people. We estimate that these goods—many of which are free to users—generate over $2.5 trillion in aggregate consumer welfare across these countries per year, which is roughly equivalent to 6% of their combined GDP. We find that lower-income individuals and lower-income countries obtain relatively larger welfare gains from these goods compared to higher-income individuals and countries. This suggests that digital goods may reduce inequality in welfare within and across countries by disproportionately benefiting lower-income groups.

Posted in Academic research & research papers, Economics - macro, micro etc | Leave a Comment »

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