Klühs, Theres (Leibniz University of Hannover)
Koch, Melanie (DIW Berlin)
Stein, Wiebke (Leibniz University of Hannover)
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.
household debt; lab-in-the-field experiment; emerging markets
D14; D84; D91