Kabir Dasgupta, Brenden J. MasonWe exploit the spatiotemporal variation in US states’ interest rate ceilings on small-dollar loans to identify the effect of liquidity constraints on labor supply. Exogenously-capped interest rates lead to consumers being shut out of the market for cash loans. In response, labor supply increases by approximately 0.4 hours per week. We also find that the propensity to take personal leaves decreases. Labor supply, therefore, is used to overcome financial constraints, but is not the only method: the effect on earnings is less than many small-dollar loans, suggesting that borrowers employ multiple mechanisms to cope with tightened credit conditions.
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