Professor Nicola Pavanini will present the paper “The Welfare Effects of Law Enforcement in the Illegal Money Lending Market”.
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 find that a large enforcement crackdown that occurred during our sample period raised interest rates and lowered the volume of loans. The welfare of borrowers and lenders that conduct harassment frequently fell, but less-harsh lenders gained through the higher interest rates. We compare this strategy to targeting borrowers. We find that targeting borrowers in the middle of the repayment ability distribution is the most effective at lowering lender welfare.