Unexpected Expenditure and High-cost Credit


Every year, tens of millions of adults in the US rely on high-cost credit such as payday loans for liquidity, and most loans are rolled-over multiple times, resulting in high accumulated fees. I find that the use of high-cost credit is associated with (a series of) unexpected expenditures in families with low income. Using PSID and the Consumer Expenditure Survey, I document the variation in shares of unexpected expenditure in household spending across households of different income and wealth profiles. I provide a theory of earnings, wealth and expense uncertainty and study the conditions under which frequent borrowing of high-cost credit arises.