Abstract

Brazil initiated a major credit expansion program through government banks in2011. The program primarily targeted public sector workers, who had stable pay-roll, with offers of payroll-backed loans. Using individual-level administrative data on income, borrowing, and spending, we find that the program led to a large 15percentage point rise in debt to initial income for public sector workers. We develop a new method for estimating expected income growth for workers, and show that a “consumption smoothing” motive cannot explain the rise in consumer borrowing. Instead, there is strong support for a “consumption binging” hypothesis: less financially sophisticated public sector workers borrowed more at high real interest rates of around 20%, and they ended up experiencing both higher consumption volatility and lower average consumption.