Measuring Aversion to Debt: An Experiment Among Student Loan Candidates
Debt aversion, an unwillingness to enter into a financial contract framed or labeled as debt, distorts household investment and financing decisions. We test through an experiment for the presence of debt aversion among a relevant population. The tests allow us to identify two sources of debt aversion: one due to framing (as debt or as an income-contingent contract) and another due to labeling (as a loan or as a human capital contract). Most of the debt aversion we identified was due to labeling. Labeling a contract as a loan decreased its probability of being chosen over a financially equivalent contract and increased its perceived cost.
KeywordsDebt aversion Human capital contracts Income contingent loans Income share agreements
We thank Juan David Herreño for valuable research assistance, Shizuka Kunimoto for help with the manuscript, the World Bank for providing funding for this project, and Lumni Inc. for conducting the surveys. We are grateful to seminar participants at the Australian National University, the University of Naples Federico II, the Darden School (University of Virginia), the University of Leicester and the World Bank for valuable suggestions and comments.
This study was funded by the World Bank.
Compliance with Ethical Standards
Conflict of interest
Caetano and Palacios received funding from The World Bank. Palacios is co-founder, shareholder, and board member in Lumni Inc.
All procedures performed in studies involving human participants were in accordance with the ethical standards of the institutional and/or national research committee and with the 1964 Helsinki declaration and its later amendments or comparable ethical standards.
Informed consent was obtained from all individual participants included in the study.
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