Extrapolative Beliefs and Financial Decisions: Causal Evidence from Renewable Energy Financing
41 Pages Posted: 11 Oct 2021 Last revised: 31 Mar 2024
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
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