Commitment in Debt Repayment: Evidence from a Natural Experiment

39 Pages Posted: 25 Feb 2021 Last revised: 19 Mar 2021

See all articles by Erkki Vihriälä

Erkki Vihriälä

Aalto University - Department of Finance

Date Written: February 25, 2021

Abstract

I present evidence of household commitment in debt repayment. In a natural experiment giving households a free option of mortgage payment flexibility for one to twelve months, almost half of
applicants restrict flexibility length ex ante, although maximum flexibility is the dominant option. Commitment to short flexibility accords with worries about self-control, because consumption drops
at the predictable end of flexibility. Moreover, restricting flexibility correlates with other commitment
proxies, including preferring less liquid deposits and saving in zero-interest tax refunds. Commitment can reduce the potency of debt-repayment modification offers in recessions
and contribute to the illiquidity of household assets.

Keywords: commitment, flexibility, self-control, mortgages, consumption smoothing

JEL Classification: D14, D15, D91, E21, G51

Suggested Citation

Vihriälä, Erkki, Commitment in Debt Repayment: Evidence from a Natural Experiment (February 25, 2021). Available at SSRN: https://ssrn.com/abstract=3792708 or http://dx.doi.org/10.2139/ssrn.3792708

Erkki Vihriälä (Contact Author)

Aalto University - Department of Finance ( email )

Finland

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