Financial Trouble Across Generations: Evidence from the Universe of Personal Loans in Denmark

51 Pages Posted: 1 Jun 2016

See all articles by Claus Thustrup Kreiner

Claus Thustrup Kreiner

University of Copenhagen - Department of Economics

Søren Leth‐Petersen

University of Copenhagen - Department of Economics

Louise Willerslev-Olsen

University of Copenhagen

Date Written: May 2016

Abstract

Do people end up in financial trouble simply because of adverse shocks to income and wealth, or is financial trouble related to persistent differences in financial attitudes and behavior that may be transmitted from generation to generation? We address this question using a new administrative data set with longitudinal information about defaults for the universe of personal loans in Denmark. We provide non-parametric evidence showing that the default propensity is more than four times higher for individuals with parents who are in default compared to individuals with parents not in default. This intergenerational relationship is apparent soon after children move into adulthood and become legally able to borrow. The intergenerational relationship is remarkably stable across age groups, levels of loan balances, parental income levels, childhood school performance, time periods and different measures of financial trouble. Basic theory points to three possible explanations of the correlation across generations in financial trouble: (i) children and parents face common shocks; (ii) children and parents insure each other against adverse shocks; (iii) financial behavior differs across people and is transmitted across generations. Our evidence indicates that the last explanation is the most important. Finally, we show that the intergenerational correlation in financial trouble is not fully incorporated in interest setting on loans, pointing to adverse selection in the market for personal loans.

Keywords: default, Household borrowing decisions, intergenerational dependency

JEL Classification: D12, D91, G20

Suggested Citation

Kreiner, Claus Thustrup and Leth-Petersen, Soren and Willerslev-Olsen, Louise, Financial Trouble Across Generations: Evidence from the Universe of Personal Loans in Denmark (May 2016). CEPR Discussion Paper No. DP11292. Available at SSRN: https://ssrn.com/abstract=2786894

Claus Thustrup Kreiner (Contact Author)

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

Soren Leth-Petersen

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

Louise Willerslev-Olsen

University of Copenhagen ( email )

Nørregade 10
Copenhagen, København DK-1165
Denmark

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