Wednesday 4 March 2009

Household debt repayment behaviour: what role do institutions play?

an article by Burcu Duygan-Bump (Federal Reserve Bank of Boston) and Charles Grant (University of Reading) in Economic Policy Volume 24 Issue 57

Abstract

Household debt
Despite the lively policy debate on rising household debt, arrears and personal bankruptcy filings, there is relatively little empirical evidence on the determinants of households’ debt repayment behaviour, or on the incidence of arrears. Even less is known about how arrears compare between countries, although debt levels are known to vary widely. Using data from the European Community Household Panel, the authors first show that arrears are frequently associated with subsequent adverse consequences, such as future unemployment or bad health. Second, they find that arrears are often precipitated by an adverse shock to the household’s income or health, but that there are large differences between countries in how households react to these events. Finally, they show that these differences can be partly explained by local financial and judicial institutions, as captured by contract enforcement and information sharing indicators. In other words, they show that while adverse shocks are highly important, the extent to which these affect repayment behaviour depends crucially on the penalty for defaulting. This finding suggests that although repayment problems often arise from a genuine inability to repay, some households seem to behave strategically.

We are very grateful to Clemens Fuest, Jean Imbs, and three anonymous referees for their extremely valuable comments and suggestions, which proved crucial in shaping our ideas and this paper. We would also like to thank Brian Bucks, Guglielmo Weber, and seminar participants at Bilkent University, European University Institute, Federal Reserve Bank of Boston, the Royal Economic Society Meeting, and the Second Italian Congress of Econometrics and Empirical Economics, for helpful comments on a preliminary version of this paper. The views expressed in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve System or of the Federal Reserve Bank of Boston.
The Managing Editor in charge of this paper was Jan van Ours.



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