Household Debt Overhang and Human Capital Investment
85 Pages Posted: 22 Aug 2022 Last revised: 23 Feb 2024
Date Written: February 22, 2024
Unlike labor income, human capital is inseparable from individuals and does not completely accrue to creditors, even at default. As a result, human capital investment should be more resilient to "debt overhang" than labor supply. We develop a dynamic model displaying this important difference. We find that while both labor supply and human capital investment are hump-shaped in household indebtedness, human capital investment tails off less aggressively as indebtedness builds up. This is especially the case when human capital depreciation rates are lower. Importantly, because skills acquisition is only valuable when households expect to supply labor in the future, the anticipated greater reduction in labor supply due to debt overhang back-propagates into a reduction in skills acquisition ex ante. Using longitudinal data, we provide empirical support for the model.
Keywords: Household leverage, Human capital investment, Labor skills acquisition, Debt overhang, household default
JEL Classification: G20, G21, G30, G32, L10, L20
Suggested Citation: Suggested Citation