Household Debt: Facts, Puzzles, Theories, and Policies

Abstract

Borrowing decisions affect most households, with large stakes and implications for research subfields as varied as macroeconomics and industrial organization. I review theoretical and empirical work on household debt: its prevalence, level, growth, and composition, as well as various measures of consumer choice and market (in)efficiency, elasticities, and prices, including new evidence on how borrowing heterogeneity affects the distribution of the opportunity cost of consumption. I also discuss opportunities and challenges in policy evaluation. A key takeaway is that puzzles abound, and I highlight numerous avenues for further research. 251

Saving more in groups: Field experimental evidence from Chile

“…A certain buffer of precautionary savings may be valuable in specific cases. For example, because of the different liquidity of savings and loans (Zinman, 2007), the rigid schedule of the micro-loans may render those loans unsuitable for covering irregular or unexpected financial needs (Karlan and Mullainathan, 2009). 4 This question is beyond the scope of this paper.…”

“…3 In other settings, it seems that households are quite good at making optimal decisions about saving vs. borrowing (Telyukova, 2013;Zinman, 2015). For a more detailed discussion, see Section 2.1.…”

“…With respect to whether it is optimal for participants to hold debt and assets at the same time (condition 1 above), Telyukova (2013) shows that people hold (credit card) debt and "low return liquid assets" (such as cash in the bank) because of transaction frictions (see also the evidence in Zinman, 2007). She finds that a substantial fraction of households keep cash because they anticipate situations where they cannot use their credit card and will therefore need to access their liquid assets.…”

“…The existing evidence indicates that households are often optimally allocating between savings and debt (see Zinman, 2015, for an excellent review). On the other hand, behavioral factors can also lead to 10 We thank an anonymous referee for suggesting these specific conditions.…”

Growing Up without Finance

“…Consumer credit markets have high-stakes and affect most households, yet there is substantial variation in household behavior in these markets that is not well understood (Zinman, 2015). To better understand the financial decision-making of households in credit markets, recent research considers the effects of individual characteristics, such as cognitive biases and financial education (Agarwal et al, 2009;Keys and Wang, 2016;Brown et al, 2016).…”