Commitment in Debt Repayment: Evidence from a Natural Experiment

Abstract

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.

Avatar
Erkki Vihriälä
Postdoctoral Researcher