Household Debt and Social Interactions

Abstract

Can concern with relative standing, which has been shown to influence consumption and labor supply, also increase borrowing and the likelihood of financial distress? We find that perceived peer income contributes to debt and the likelihood of financial distress among those who consider themselves poorer than their peers. We use unique responses describing perceived peer characteristics from a Dutch population-wide survey to handle two major challenges of uncovering social interaction effects on borrowing: (1) debts, unlike conspicuous consumption, are often hidden from peers and (2) location is missing in anonymized data. We employ several approaches to uncover exogenous, rather than correlated, effects. (JEL G11, E21)The role of relative standing has been explored in many contexts, including consumption behavior and labor supply, 1 but less attention has been paid to how "catching up" or "keeping up" with peers is financed. In particular, almost no attention has been paid to whether perceptions of relative standing contribute to borrowing and to the potential for financial distress. Are people who perceive themselves as poorer than their social circle more likely to borrow and, ifWe are grateful to an anonymous referee and Alexander Ljungqvist (editor) for their very helpful comments. We would also like to thank

Credit Cards: Transactional Convenience or Debt‐Trap?

“…Panels H and I of Table present the results on the self‐assessment of importance, on a scale from 1 to 5, of the reasons to have or not to have a credit card (Panels H and I, respectively). While previous studies into credit card use (e.g., Laibson et al (), Georgarakos et al ()) focus on credit card debt as a means of increasing borrowing facilities available to households, only 36% of the respondents in our sample cited access to credit as at least a somewhat important reason to have a credit card (rated 3 or above on a scale of 1 to 5). Another 11% agreed that credit cards were helpful in building credit history, which indirectly supports the credit access role of credit cards.…”

“…Bertaut et al () hypothesize that credit card debt is used by households for spending control purposes that involve either conflict resolution between different members of the household or a self‐control role for a single individual. Finally, Georgarakos et al () argue that concern about relative social standing, expressed in terms of household consumption, can increase borrowing by households.…”

Informative Social Interactions

“…Given that respondents do not directly discuss …nancial matters with people outside their …nancial circle, any respondent perceptions of shares of the outer circle are likely to be less precise than perceptions regarding the …nancial circle. 32 We instrument responses on stock market information or participation in the outer circle with responses of the same individuals regarding the respective share in the overall population (see Table 5, columns 1-4).…”

Peers’ Income and Financial Distress: Evidence from Lottery Winners and Neighboring Bankruptcies

“…The aim of this paper is to provide new evidence on this hypothesis of Georgarakos, Haliassos, and Pasini (2014), and Bertrand and Morse (2016) linking social comparisons between peers to debt and financial distress. Relative income comparisons are important because they can increase consumption of peers (Kuhn, Kooreman, Soetevent, and Kapteyn, 2011) and lead to increases in borrowing and decreases in savings (Angelucci and De Giorgi, 2009).…”

“…Recent research, however, has extended this peer-effects literature to examine the specific impact of social comparisons on the financial status of the peers. In particular, Georgarakos, Haliassos, and Pasini (2014), and Bertrand and Morse (2016) have proposed the hypothesis that if social comparisons between peers, with relative differences in income, generates an unsustainable accumulation of debt, then these social comparisons can lead to increased financial distress.…”