Non-Cognitive Abilities and Financial Delinquency: The Role of Self-Efficacy in Avoiding Financial Distress

36 Pages Posted: 11 Jan 2017

See all articles by Camelia M. Kuhnen

Camelia M. Kuhnen

University of North Carolina Kenan-Flagler Business School & NBER

Brian Melzer

Federal Reserve Bank of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: January 2017

Abstract

We investigate a novel determinant of household financial delinquency, namely, people’s subjective expectations regarding the cost-benefit trade-off in default decisions. These expectations are determined by individuals’ self-efficacy, which is a non-cognitive ability that measures how strongly people believe that their effort will influence future outcomes. Using longitudinal household survey data, we show that people with higher self-efficacy, measured earlier in life, are less likely to be financially delinquent later on and to face consequences such as losing assets or access to traditional credit markets, are more likely to prepare for dealing with potential adverse shocks such as a job loss or a health event, and when faced with such shocks, are less likely to become financially delinquent. Complementing prior findings regarding the effects of cognitive abilities, financial literacy and education on economic behavior, our evidence suggests that non-cognitive abilities have an important role in household financial decision making.

Suggested Citation

Kuhnen, Camelia M. and Melzer, Brian, Non-Cognitive Abilities and Financial Delinquency: The Role of Self-Efficacy in Avoiding Financial Distress (January 2017). NBER Working Paper No. w23028. Available at SSRN: https://ssrn.com/abstract=2895881

Camelia M. Kuhnen (Contact Author)

University of North Carolina Kenan-Flagler Business School & NBER ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
(919) 9623284 (Phone)

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/kuhnenc/

Brian Melzer

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

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