Working Papers

I present evidence of household commitment in debt repayment. In a natural experiment giving households a free option of mortgage payment flexibility for one to twelve months, almost half of applicants restrict flexibility length ex ante, although maximum flexibility is the dominant option. Commitment to short flexibility accords with worries about self-control, because consumption drops at the predictable end of flexibility. Moreover, restricting flexibility correlates with other commitment proxies, including preferring less liquid deposits and saving in zero-interest tax refunds. Commitment can reduce the potency of debt-repayment modification offers in recessions and contribute to the illiquidity of household assets.

Best PhD Student Paper Award at the CEPR Fourth European Workshop on Household Finance

I explain the credit card debt puzzle – the co-holding of high-cost debt and low-yield liquid assets – with a household and individual determinant that lower debt repayments. At the household level, co-holding is consistent with intra-household frictions. Couples co-hold 40 percent more than individuals relative to income, and couples do not cooperate when given an option to reduce high-cost debt. At the individual level, anchoring contributes to co-holding, because credit card debt payments are often equal to or near the minimum despite high liquidity. Individuals with low regular payments account for over half of total individual co-holding.