Author:
Klühs, Theres (Leibniz University of Hannover)
Koch, Melanie (DIW Berlin)
Stein, Wiebke (Leibniz University of Hannover)
Abstract:
Household indebtedness is rising worldwide. This study investigates one possible driver of this increase that is rooted in the theory of permanent income: high income expectations. We collect data from an emerging country, Thailand, as (over-) indebtedness in markets with incomplete financial infrastructure and social security can be devastating. Furthermore, our sample of rural households is exposed to a high degree of uncertainty, which makes expectation formation prone to behavioral biases. We implement a new measure for high income expectations and show that it is strongly and robustly related to both objective and subjectively felt over-indebtedness. Controlling for various household characteristics, unexpected shocks, and other possible confounding factors reduces the concern about reverse causality. In an additional lab-in-the-field experiment, we explicitly find that overconfidence, a specific form of biased expectation, is related to overborrowing.
Keywords:
household debt; lab-in-the-field experiment; emerging markets
JEL-Classification:
D14; D84; D91