Commitment in debt repayment: evidence from a natural experiment

Vihriälä, Erkki

doi:10.2139/ssrn.3792708

Cited by 4 publications

(14 citation statements)

References 33 publications

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“…Unemployment duration is measured using UI checks through the sixth month of UI receipt and labor market biographies afterward. 14 Our choice of an evolving sample is a convenient way to summarize the data, but is not quantitatively important for our empirical results. A spending series where the sample is limited to UI exhaustees yields quite similar results, as shown in online Appendix Figure 4.…”

Section: A Path Of Spending During Unemploymentmentioning

confidence: 99%

“…Due to variation in the frequency of UI check payments, we implement this screen by sampling households who receive at least one UI check in the subsequent month 14. One potential concern about using labor market biographies to infer continued unemployment after UI exhaustion is that this strategy will mislabel as unemployed people who actually found a job, but either had that paycheck deposited to a non-Chase account or were paid by paper check.…”

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confidence: 99%

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Consumer Spending during Unemployment: Positive and Normative Implications

Ganong

Noel

2019

American Economic Review

300

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Using de-identified bank account data, we show that spending drops sharply at the large and predictable decrease in income arising from the exhaustion of unemployment insurance (UI) benefits. We use the high-frequency response to a predictable income decline as a new test to distinguish between alternative consumption models. The sensitivity of spending to income we document is inconsistent with rational models of liquidity-constrained households, but is consistent with behavioral models with present-biased or myopic households. Depressed spending after exhaustion also implies that the consumption-smoothing gains from extending UI benefits are four times larger than from raising UI benefit levels. (JEL D14, D91, E21, E24, E70, J65)

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Section: A Path Of Spending During Unemploymentmentioning

confidence: 99%

mentioning

confidence: 99%

Consumer Spending during Unemployment: Positive and Normative Implications

Ganong

Noel

2019

American Economic Review

300

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“…It seems that loan decisions are not only challenging for consumers because they tend to be overconfident about their ability to make repayments (Vihriälä 2021) and because they may succumb to focusing illusion, but also because they seem to be lost in the forest of information and complexity. To mitigate the hardships due to the complexity of loan contracts and also to protect borrowers against inaccurate and unfair credits, in 1968 the so-called Truth in Lending Action (TILA; 15 U.S.C.…”

Section: The Effectiveness Of Loan Disclosure Policiesmentioning

confidence: 99%

“…Due to limited financial resources, low-income households have an elevated risk of experiencing loan defaults and financial vulnerability in general related to debt products (Kim et al 2017). Indeed, Vihriälä (2021) reports, for instance, that younger people with larger families, with relatively little liquid assets and more interest-paying unsecured debts, were the ones opting for a short-term (i.e., six to twelve months) principle payment reliefs offered by Finnish banks in 2015. Consistent with these, Xiao and Yao (2014) report that younger, lower-income and non-white people with larger families are experiencing increasing hardships in making repayments on their auto or durable good loans.…”

Section: Introductionmentioning

confidence: 99%

“…Among these biases, present bias (e.g., Frederick et al 2008;Meier and Sprenger 2012;Strotz 1955) and focusing illusion or focusing bias (e.g., Friztdixon et al 2014;Kőszegi and Szeidl 2013) play key roles in overborrowing. Moreover, overoptimism (Hynes 2004;Brown et al 2005;Dezső and Loewenstein 2012;Dezső and Kirchler 2013) and overconfidence (Perry 2008;Robb et al 2015;Vihriälä 2021) regarding the ability to repay a loan are also key contributors to premature loan consumption. These latter two biases are, however, not the focus of our research.…”

Section: Introductionmentioning

confidence: 99%

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Exploiting context-dependent preferences to protect borrowers

2021

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Focusing bias is one of the key contributors to over-borrowing. It describes how people, when making choices, give disproportionate attention and weight to attributes in which their options differ more. In a loan decision, a consumer excessively focuses on the eye-catching difference between getting the loan and not getting it, while ignoring the smaller differences between making and not making repayments. Here, we show a simple trick that nudges the consumer to increase attention on the repayment dimension. In two experimental studies involving one hypothetical loan decision, we demonstrate that the salience of getting the loan can be decreased if one offered plan includes high initial installments. This steeply decreasing installment plan (i.e., with initially high installments that decrease over time) offered alongside the usual flat installments plan (i.e., with equally sized repayments through the whole term) increases consumers’ attention to making repayments, and consequently, they attend less to obtaining the loan. When the choice set includes the steeply decreasing plan, we observe a decreased preference for the flat installment plan and a shift toward not borrowing. Additionally, making repayments on the loan is perceived as a greater burden, and more attention is given to making repayments when the steep plan is present. Policy may combat harmful loan consumption by prescribing the presentation of loan offers such that at least one option includes high initial repayments, which increases attention on making repayments.

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Temptation and Commitment: a Model of Hand-to-Mouth Behavior

Attanasio,

Kovacs,

Moran

2024

Journal of the European Economic Association

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This paper presents a model of consumption behavior that explains the presence of ‘wealthy hand-to-mouth’ consumers using a mechanism that differs from those analyzed previously. We show that a two-asset model with temptation preferences generates a demand for commitment and thus illiquidity, leading to hand-to-mouth behavior even when liquid assets deliver higher returns than illiquid assets. This preference for illiquidity has important implications for consumption behaviour and for fiscal stimulus policies. Our model matches the recent empirical evidence that MPCs remain high even for large income shocks, suggesting a larger response to targeted fiscal stimulus than previously believed.

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Commitment in debt repayment: evidence from a natural experiment

Cited by 4 publications

References 33 publications

Consumer Spending during Unemployment: Positive and Normative Implications

Consumer Spending during Unemployment: Positive and Normative Implications

Exploiting context-dependent preferences to protect borrowers

Temptation and Commitment: a Model of Hand-to-Mouth Behavior

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