Behavioral economic drivers of debt and default
|Coordinator||Swedish House of Finance|
|Funding from Vinnova||SEK 2 600 000|
|Project duration||February 2015 - August 2019|
|Venture||Financial Market Research|
Purpose and goal
The goal of this project is to deepen our understanding of behavioral drivers of debt and ´default´. Our research contributes to this understanding by highlighting the causal effects of ´scarcity´ on short-term behavior in the credit market and its impact on the financial prosperity of low-income households in Sweden.
Expected results and effects
Our analysis show that governments and regulators might have an alternative route to travel when they aim to reduce the negative consequences of high interest rate borrow ing that does not involve regulating credit markets themselves. To reduce fluctuations in the levels of scarcity,wages and social transfers could be paid out at a regularly spaced, higher frequency. Furthermore, the mismatch between the timing of (regular) bills and income could be minimized by requiring more flexibility in the payment of bills.
Planned approach and implementation
In our analysis we exploit the random timing of welfare payments embedded in the Swedish social welfare system, which makes some welfare cycles exogenously longer than others. We use a daily pawn credit panel merged with data from the Swedish credit registry and detailed income and demographic records from Statistics Sweden. Our sample is well suited to measure the effects of scarcity on consumer credit decisions because it consists of individuals who typically live from ´paycheck to paycheck´ and borrowing costs represent a large share of their income.