Targeted Debt Relief and the Origins of Financial Distress: Experimental Evidence from Distressed Credit Card Borrowers

76 Pages Posted: 25 Nov 2019

See all articles by Will Dobbie

Will Dobbie

Harvard University - Harvard Kennedy School (HKS)

Jae Song

Government of the United States of America - Social Security Administration

Date Written: August 1, 2019

Abstract

We study the drivers of financial distress using a large-scale field experiment that offered randomly selected borrowers a combination of (i) immediate payment reductions to target short-run liquidity constraints and (ii) delayed interest write-downs to target long-run debt constraints. We identify the separate effects of the payment reductions and interest write-downs using both the experiment and cross-sectional variation in treatment intensity. We find that the interest write-downs significantly improved both financial and labor market outcomes, despite not taking effect for three to five years. In sharp contrast, there were no positive effects of the more immediate payment reductions. These results run counter to the widespread view that financial distress is largely the result of short-run constraints.

Suggested Citation

Dobbie, Will and Song, Jae, Targeted Debt Relief and the Origins of Financial Distress: Experimental Evidence from Distressed Credit Card Borrowers (August 1, 2019). HKS Working Paper No. RWP19-030, Available at SSRN: https://ssrn.com/abstract=3491856 or http://dx.doi.org/10.2139/ssrn.3491856

Will Dobbie (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

Jae Song

Government of the United States of America - Social Security Administration

Washington, DC 20254
United States

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