Household Debt Overhang and Human Capital Investment

85 Pages Posted: 22 Aug 2022 Last revised: 23 Feb 2024

See all articles by Gustavo Manso

Gustavo Manso

University of California, Berkeley - Haas School of Business

Alejandro Rivera

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Hui Wang

Bentley University - Department of Finance

Han Xia

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: February 22, 2024

Abstract

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

Manso, Gustavo and Rivera, Alejandro and Wang, Hui and Xia, Han, Household Debt Overhang and Human Capital Investment (February 22, 2024). Available at SSRN: https://ssrn.com/abstract=4190550 or http://dx.doi.org/10.2139/ssrn.4190550

Gustavo Manso

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Alejandro Rivera

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

HOME PAGE: http://jindal.utdallas.edu/faculty/alejandro-rivera

Hui Wang

Bentley University - Department of Finance ( email )

175 Forest St
Waltham, MA 02452
United States

Han Xia (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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