DP16779 The Welfare Effects of Law Enforcement in the Illegal Money Lending Market

Author(s): Kaiwen Leong, Huailu Li, Nicola Pavanini, Christoph Walsh
Publication Date: December 2021
Keyword(s): crime, Illegal Moneylending, law enforcement, Loan Sharks
JEL(s): G51, K42
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16779

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 our model to estimate the welfare effects of a large enforcement crackdown that occurred during our sample period. The crackdown raised interest rates, lowered the volume of loans, and lowered the welfare of borrowers. The welfare of lenders that conduct harassment more frequently fell, but less-harsh lenders gained through the higher interest rates. We compare this strategy to an alternative policy of targeting borrowers. We find that targeting borrowers with medium ability to repay is more effective at lowering lender welfare than targeting those with low or high repayment ability.