The Effect of Litigation Finance on Credit Outcomes

Ching-Tse Chen, Finance PhD Student

The project aims to explore the effect of consumer litigation finance (CLF) availability on household credit outcomes. In particular, I would test whether state-level restrictions on CLF adversely affect households that suffered personal injuries or property damages. The effect of CLF on households is theoretically ambiguous. On one hand, cash advances from CLF companies may provide relief to financially constrained households that lost their income due to injuries and were otherwise unable to borrow. On the other hand, the high cost of CLF may leave households worse off even if they were able to obtain compensation through settlements or trials. My identification strategy will exploit the staggered introduction of CLF restrictions across different states, such as the prohibition of CLF in Ohio in 2003 as well as the interest rate cap on CLF loans introduced in various states. The findings of this project will be the first to shed initial light on the effect of CLF on households and will contribute to the debate on the value of consumer litigation finance.