Extrapolative Beliefs and Financial Decisions: Causal Evidence from Renewable Energy Financing

41 Pages Posted: 11 Oct 2021 Last revised: 31 Mar 2024

See all articles by Li An

Li An

Tsinghua University - PBC School of Finance

Yinghao Pan

Renmin University of China

Yu Qin

National University of Singapore (NUS) - Department of Real Estate

Date Written: October 10, 2021

Abstract

How do expectation biases causally affect households’ financial decisions? We exploit a unique setting and study the repayment decision in solar loans, in which households borrow to purchase and install solar photovoltaic (PV) systems. Electricity production – the benefit that solar panels generate – primarily depends on sunshine duration. This creates exogenous within-person across-period variation in recent signals that borrowers observe and thereby expectations of future electricity production. We find that a one-standard-deviation decrease in sunshine duration in the week right before the repayment date leads to a 22% increase of delinquency, even though deviated past sunshine duration does not predict that in the future. Survey evidence shows that agents make more positive forecasts of future electricity production after experiencing longer sunshine duration in the past week. We examine a battery of alternative explanations and rule out mechanisms based on liquidity constraints and wealth effects.

Keywords: extrapolative beliefs, household debt, default, renewable energy

Suggested Citation

An, Li and Pan, Yinghao and Qin, Yu, Extrapolative Beliefs and Financial Decisions: Causal Evidence from Renewable Energy Financing (October 10, 2021). Available at SSRN: https://ssrn.com/abstract=3939686 or http://dx.doi.org/10.2139/ssrn.3939686

Li An

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Yinghao Pan

Renmin University of China ( email )

Beijing

HOME PAGE: http://yinghaopan.com

Yu Qin (Contact Author)

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
184
Abstract Views
691
Rank
315,337
PlumX Metrics