Missing Repayments on Haze Days: Evidence From Household Debt

Abstract

This study examines the impact of air pollution on a frequent financial decision that is cognitively less demanding. Based on 259,018 repayment records from a leading P2P lending platform in China, we find that borrowers are more likely to miss their repayments when the scheduled repayment days witness heavier air pollution. Deterioration of air quality from "excellent" to "severely polluted" is associated with an increase in delinquency rate by 155.6 basis points (12.4%) after controlling for city-by-year-month, date, and loan fixed effects, as well as for local weather conditions. Instrumental variable estimates based on pollution transport by winds show similar results. The increased incidence of delinquency is likely to be explained by pollution-induced "behavioral" mistakes rather than borrowers' lack of long-term solvency or short-term liquidity. However, pollution-induced delinquency events reduce borrowers' credit ratings and success rates of future loan applications, with the effect as large as that due to delinquencies unlikely driven by pollution, implying a misallocation of credit. We also document a similar delinquency response using an alternative dataset of mortgage repayments.

Keywords: Air Pollution, Household Finance, Financial Mistake, Credit Misallocation, Debt, Credit Access, P2P Lending

JEL Classification: D14, G23, G40, G51, Q51, Q53