Commitment in Debt Repayment: Evidence from a Natural Experiment

Abstract

This paper presents 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 accords with self-control induced worries about overconsumption, because consumption drops discontinuously at the predictable end of flexibility. Although differences in observable characteristics between short and maximum flexibility applicants are small, application for short flexibility correlates with other commitment proxies, including preferring less liquid deposits and saving in delayed zero-interest tax refunds.

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Erkki Vihriälä
Postdoctoral Researcher