When It Rains It Drains: Psychological Distress and Household Net Worth

Abstract

This paper establishes a sizeable effect of mental health on individuals' abilities to accumulate wealth. In a representative panel of U.S. households, we find that psychological distress increases the likelihood of entering into and remaining for longer periods of time in deficit net worth, where levels of debt outstrip the values of assets. This relation arises largely from poor mental health interfering with everyday decision-making, leading to the depletion of assets and a disproportionate uptake of unsecured debt. Using survival analysis, we show that psychological distress accelerates entry into deficit net worth, as well as re-entry for individuals who have succeeded in regaining positive net wealth. We address causal identification challenges by exploiting the panel nature of the data and using an instrumental variables approach. Our findings highlight that longer-term implications on the inability to accumulate wealth due to mental distress can be significant.

Keywords: Psychological distress, Mental health, Net worth, Wealth accumulation

JEL Classification: D14, D31, I14