Scarcity and Consumers’ Credit Choice
53 Pages Posted: 7 Oct 2016 Last revised: 5 Jul 2018
There are 2 versions of this paper
Scarcity and Consumers’ Credit Choice
Economic Scarcity and Consumers’ Credit Choice
Date Written: May 1, 2017
Abstract
This paper documents that high-educated borrowers choose lower loan to value ratios when their budget constraints are exogenously tighter. In contrast, low-educated borrowers do not respond to temporary elevated levels of scarcity. This lack of response translates into a significantly higher probability to default and an 11.6 percent increase in borrowing cost. We show that a difference in access to liquidity and/or buffer stocks cannot explain our results. Instead a framework where the awareness of self-control problems is positively correlated with education explains why high-educated, but not low-educated, consumers choose a lower LTV as a commitment device. Our findings highlight that increased levels of scarcity risk reinforcing the conditions of poverty
Keywords: household finance, credit choice, scarcity, time preferences
JEL Classification: G41, D12, D14, D15, D91
Suggested Citation: Suggested Citation