Abstract

This paper investigates the relationship between payday borrowing and individual's present bias, a cognitive inclination toward short-term gratification while ignoring long-term consequences. We use U.S. government stimulus cash during the COVID-19 pandemic as a quasi-natural experiment. The present biased individuals are defined as those who spent the cash to make purchases and not to save or invest, or those who did not pay off debt while having a debt problem. Our findings suggest that individuals with stronger present bias are more likely to borrow payday loans. And among the payday borrowers, the frequency of borrowing increases with the level of present bias. These effects are robust after financial literacy, financial distress, and demographic characteristics are controlled and after propensity score matching is applied. Moreover, we find that present bias decreases with the level of financial literacy, suggesting the importance of financial education for the correction of cognitive bias. Lastly, we find that present bias also determines the usage of other expensive financial services such as pawn loans, title loans, etc.