Relative Income, Indebtedness and Defaults: An Empirical Characterization

Abstract

Using panel data on individual borrowing characteristics and neighborhood income, we assess the impact of relative income on indebtedness and payment delinquencies. We find that a worsening in relative income vis-à-vis similarly aged neighbors leads to higher indebtedness, primarily due to shifts in consumer debt. This relationship is not accompanied by a rise in loan delinquencies. However, we document over-indebtedness and financial distress for certain demographic subgroups that are presumably more responsive to peer influences (e.g., younger individuals). Our analysis is carefully structured to account for selection effects and omitted variables.

Keywords: Peer Effects, Consumer Credit, Defaults

JEL Classification: G41, D12, D14, D15, D91