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The Opportunity Cost of Debt Aversion

Author

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  • Alejandro Martínez-Marquina
  • Mike Shi

Abstract

We provide evidence of the existence of debt aversion and its negative implications for financial decisions. In a new experimental design where subjects are assigned debt randomly, we quantify the opportunity cost of subjects' debt-biased decisions. One-third of our participants neglect high returns and focus instead on debt repayments. In addition, borrowing to invest is 50 percent less likely when it leads to indebtedness. On average, participants perceive $1 less in debt as equivalent to $1.03 in savings. Hence, a debt-averse agent will undertake a 10 percent guaranteed investment only if the cost of borrowing does not exceed 6.80 percent.

Suggested Citation

  • Alejandro Martínez-Marquina & Mike Shi, 2024. "The Opportunity Cost of Debt Aversion," American Economic Review, American Economic Association, vol. 114(4), pages 1140-1172, April.
    • Handle: RePEc:aea:aecrev:v:114:y:2024:i:4:p:1140-72
    DOI: 10.1257/aer.20221509
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    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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