Demand for Rent-to-own Contracts: A Behavioral Economic Explanation

Publication Date:
Jan 1999
Project Programs:
Behavioral Economics

Rental purchase contracts for consumer durables, often described as `renting-to-own,' typically require total payments two to four times greater than retail prices. Under such conditions, why do lower income consumers ever select this option? Within several low-income samples we consider liquidity constraints, time preferences and risk attitudes as possible explanations for this demand. Use of these services appears to be a risk-averse response to the income and expense shocks faced by low-income households and a financial management tool to address myopic time preferences.

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