The Political Origins of Household Indebtedness. On the Role of Welfare States and Credit Regimes
44 Pages Posted: 11 Jul 2019 Last revised: 9 Sep 2019
Date Written: September 1, 2019
Debt has become an essential part of many families' daily lives. This paper introduces a "social policy theory of everyday borrowing" that helps explain when credit markets substitute or complement welfare states and why patterns of indebtedness diverge across and within countries. I argue that the interaction of welfare states and credit regimes constrains how households cope with financial shortfalls. In weak welfare states and permissive credit regimes, households borrow money as a private coping mechanism. In restrictive regimes, by contrast, households draw on savings and cut expenditures. Using event studies and difference-in-differences designs based on full-population data from Denmark and panel data in the U.S., I document how welfare state coverage and credit access shape variation in debt burdens across income groups. The findings expand comparative political economy work on the links between financial markets and welfare states as drivers behind indebtedness and point to socio-economic and distributional consequences.
Keywords: comparative political economy, household debt, social policy, financial markets
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