Structured Payment in Pawnshop Borrowing: Mandates vs. Choice

2026-08-13

AI Summary

This study addresses the trade-off between repayment flexibility and default penalties in pawnshop lending through a large-scale randomized controlled trial in Mexico City. We rigorously identify the causal effects and selection gains of mandatory versus self-selected structured repayment contracts. Results indicate that structured repayment reduces financial costs by 19% and default rates by 17.5%; however, only 11% of borrowers voluntarily opt in, with no significant evidence of selection gains. By innovatively disentangling treatment effects from selection mechanisms, this research reveals the practical value of substituting flexibility with structure while highlighting demand-side limitations. These findings provide critical empirical evidence for consumer credit contract design, demonstrating that although structured repayment improves outcomes, low voluntary uptake suggests behavioral or preference-based barriers to adoption.

Abstract

Pawn loans offer borrowers a substantial degree of repayment flexibility in exchange for a harsh penalty in case of default: forfeit of collateral worth more than the loan amount along with any payments made toward recovery. Using a large RCT conducted in Mexico City, we document key stylized facts about pawn lending and explore the merits of replacing flexibility with structured repayment contracts in this important but understudied form of credit. Our experimental design includes a mandatory frequent-payments arm, a (status quo) flexible payments arm, and a choice between the two. This design point-identifies not only the average treatment effect, but also the effects of treatment on the treated and the untreated along with the average selection on gains, allowing a rigorous study of mandates versus choice. Although the average treatment effect of assigning borrowers to structured payments is a 19% decrease in their financial cost and a 17.5% decrease in the probability of default, only 11% of borrowers choose structured repayment contracts voluntarily. We show that structured repayment reduces financial costs for nearly all borrowers, including those who would not freely choose it, and find no evidence of selection on gains in cost savings.

Problem

• Pawnshop Borrowing
• Structured Repayment
• Mandates vs. Choice
• Repayment Flexibility
• Default

Innovation

• Randomized Controlled Trial
• Point Identification
• Selection on Gains
• Structured Repayment
• Mandates vs. Choice