Loans to salaried employees: The case of the Dutch East India Company, 1602-1794

Payday loans allow salaried workers to solve cash flow problems resulting from unexpected expenses or income drops. Lenders limit moral hazard risks by rationing loan sizes and terms, but with fixed costs this results in high APRs. How can wages provide more security and facilitate more favorable conditions? This paper considers the case of the Dutch East India Company (1602-1794) whose employees borrowed larger sums, for longer terms, and lower APRs. It shows how restricting employees' discretionary behavior helped solve moral hazard problems and how financial intermediaries enabled the large-scale use of loans.