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Household debt repayment behaviour: what role do institutions play?

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  • Burcu Duygan-Bump
  • Charles Grant
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    Abstract

    "Despite the lively policy debate on rising household debt, arrears and personal bankruptcy filings, there is relatively little empirical evidence on the determinants of households' debt repayment behaviour, or on the incidence of arrears. Even less is known about how arrears compare between countries, although debt levels are known to vary widely. Using data from the European Community Household Panel, we first show that arrears are frequently associated with subsequent adverse consequences, such as future unemployment or bad health. Second, we find that arrears are often precipitated by an adverse shock to the household's income or health, but that there are large differences between countries in how households react to these events. Finally, we show that these differences can be partly explained by local financial and judicial institutions, as captured by contract enforcement and information sharing indicators. In other words, we show that while adverse shocks are highly important, the extent to which they affect repayment behaviour depends crucially on the penalty for defaulting. This finding suggests that although repayment problems often arise from a genuine inability to repay, some households seem to behave strategically". Copyright (c) CEPR, CES, MSH, 2009.

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    Bibliographic Info

    Article provided by CEPR & CES & MSH in its journal Economic Policy.

    Volume (Year): 24 (2009)
    Issue (Month): (01)
    Pages: 107-140

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    Handle: RePEc:bla:ecpoli:v:24:y:2009:i::p:107-140

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    Cited by:
    1. Charles Yuji Horioka & Shizuka Sekita, 2010. "The Degree of Judicial Enforcement and Credit Markets: Evidence from Japanese Household Panel Data," NBER Working Papers 15631, National Bureau of Economic Research, Inc.
    2. David ARISTEI & Manuela Gallo, 2012. "The Drivers of Household Over-Indebtedness and Delinquency on Mortgage Loans: Evidence from Italian Microdata," Quaderni del Dipartimento di Economia, Finanza e Statistica 105/2012, Università di Perugia, Dipartimento Economia, Finanza e Statistica.
    3. Georgarakos, Dimitris & Lojschov√°, Adriana & Ward-Warmedinger, Melanie, 2010. "Mortgage indebtedness and household financial distress," Working Paper Series 1156, European Central Bank.
    4. Erwan Quintin, 2012. "More punishment, less default?," Annals of Finance, Springer, vol. 8(4), pages 427-454, November.
    5. Claessens, Stijn & Kose, Ayhan & Terrones, Marco E., 2008. "What Happens During Recessions, Crunches and Busts?," CEPR Discussion Papers 7085, C.E.P.R. Discussion Papers.

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