The Welfare Effects of Law Enforcement in the Illegal Money Lending Market

95 Pages Posted: 6 Dec 2021 Last revised: 25 Apr 2022

See all articles by Kaiwen Leong

Kaiwen Leong

Nanyang Technological University (NTU)

Huailu Li

Fudan University, School of Economics

Nicola Pavanini

Tilburg University; Tilburg University - Tilburg University School of Economics and Management; CEPR IO Programme

Christoph Walsh

Tilburg University - Tilburg University School of Economics and Management

Multiple version iconThere are 2 versions of this paper

Date Written: April 22, 2022

Abstract

We estimate a structural model of borrowing and lending in the illegal money lending market using a unique panel survey of 1,090 borrowers taking out 11,032 loans from loan sharks. We use the model to evaluate the welfare effects of alternative law enforcement strategies. We find that a large enforcement crackdown that occurred during our sample period raised interest rates, lowered the volume of loans, increased the lenders’ unit cost of harassment, decreased lender profits, and decreased borrower welfare. We compare this strategy to targeting borrowers and find that targeting medium-performing borrowers is the most effective at lowering lender profits.

Keywords: Illegal Moneylending, Loan Sharks, Law Enforcement, Crime

JEL Classification: K42, G51

Suggested Citation

Leong, Kaiwen and Li, Huailu and Pavanini, Nicola and Walsh, Christoph, The Welfare Effects of Law Enforcement in the Illegal Money Lending Market (April 22, 2022). Available at SSRN: https://ssrn.com/abstract=3974686 or http://dx.doi.org/10.2139/ssrn.3974686

Kaiwen Leong

Nanyang Technological University (NTU) ( email )

S3 B2-A28 Nanyang Avenue
Singapore, 639798
Singapore

Huailu Li

Fudan University, School of Economics ( email )

Han Dan Lu 220 Hao, 11 Hao Lou, 128 Shi
Shanghai, Shanghai 200433
China

Nicola Pavanini (Contact Author)

Tilburg University ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://https://sites.google.com/site/nicolapavanini/

Tilburg University - Tilburg University School of Economics and Management ( email )

PO Box 90153
Tilburg, 5000 LE Ti
Netherlands

CEPR IO Programme ( email )

London
United Kingdom

Christoph Walsh

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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