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Debt and Financial Expectations: An Individual- and Household-Level Analysis

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  • Sarah Brown
  • Gaia Garino
  • Karl Taylor
  • Stephen Wheatley Price

Abstract

In this article we show that optimistic financial expectations impact positively on both the quantity of debt and the growth in debt at the individual and household levels. Our theoretical model shows that this association is predicted under a variety of plausible scenarios. In the empirical analysis we explore the determinants of debt and of growth in debt using British data. We find convincing support for our theoretical priors and show that it is optimistic financial expectations per se that are important in influencing debt, rather than the accuracy of individuals' predictions regarding their future financial situation. (JEL D18, D84, D91) Copyright 2005, Oxford University Press.

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Bibliographic Info

Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 43 (2005)
Issue (Month): 1 (January)
Pages: 100-120

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Handle: RePEc:oup:ecinqu:v:43:y:2005:i:1:p:100-120

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Cited by:
  1. Chmelar, Ales, 2013. "Household Debt and the European Crisis," ECRI Papers 8239, Centre for European Policy Studies.
  2. Sarah Brown & Karl Taylor, 2008. "Expectations, Reservation Wages And Employment: Evidence From British Panel Data," Working Papers 2008007, The University of Sheffield, Department of Economics, revised May 2008.
  3. Sarah Brown & Karl Taylor, 2011. "Household finances and the 'Big Five' personality traits," Working Papers 2011025, The University of Sheffield, Department of Economics.
  4. Lucia Dunn & Tufan Ekici, 2006. "Credit Card Debt and Consumption: Evidence from Household-Level Data," Working Papers 06-01, Ohio State University, Department of Economics.
  5. Sarah Brown & Karl Taylor & Robert McNabb, 2006. "Financial Expectations, Consumption and Saving: A Microeconomic Analysis," Working Papers 2006006, The University of Sheffield, Department of Economics, revised May 2006.
  6. Karl Taylor & Robert McNabb, 2007. "Business Cycles and the Role of Confidence: Evidence for Europe," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(2), pages 185-208, 04.
  7. Sarah Brown & John Sessions & Karl Taylor, 2004. "What Will I Be When I Grow Up? An Analysis of Childhood Expectations and Career Outcomes," Discussion Papers in Economics 05/2, Department of Economics, University of Leicester.
  8. Bernadette Kamleitner & Erich Kirchler, 2006. "Personal loan users’ mental integration of payment and consumption," Marketing Letters, Springer, vol. 17(4), pages 281-294, December.
  9. Bernadette Kamleitner & Bianca Hornung & Erich Kirchler, 2010. "Over-indebtedness and the interplay of factual and mental money management: An interview study," Working Papers 34, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
  10. Mario alejandro González & John Jairo León, . "Análisis del Endeudamiento de los Hogares Colombianos," Borradores de Economia 452, Banco de la Republica de Colombia.
  11. Herrala, Risto & Kauko, Karlo, 2007. "Household loan loss risk in Finland – estimations and simulations with micro data," Research Discussion Papers 5/2007, Bank of Finland.
  12. Sarah Brown & Gaia Garino & Karl Taylor, 2008. "Household Finances and Attitudes towards Risk," Working Papers 2008005, The University of Sheffield, Department of Economics, revised Dec 2009.
  13. Keese, Matthias, 2012. "Who feels constrained by high debt burdens? Subjective vs. objective measures of household debt," Journal of Economic Psychology, Elsevier, vol. 33(1), pages 125-141.
  14. Mewse, Avril J. & Lea, Stephen E.G. & Wrapson, Wendy, 2010. "First steps out of debt: Attitudes and social identity as predictors of contact by debtors with creditors," Journal of Economic Psychology, Elsevier, vol. 31(6), pages 1021-1034, December.
  15. Brown, Sarah & Taylor, Karl & Wheatley Price, Stephen, 2005. "Debt and distress: Evaluating the psychological cost of credit," Journal of Economic Psychology, Elsevier, vol. 26(5), pages 642-663, October.
  16. Hoelzl, Erik & Kamleitner, Bernadette & Kirchler, Erich, 2011. "Loan repayment plans as sequences of instalments," Journal of Economic Psychology, Elsevier, vol. 32(4), pages 621-631, August.
  17. Johar, Meliyanni & Rammohan, Anu, 2006. "Demand for Microcredit by Indonesian women," Working Papers 2006-03, University of Sydney, School of Economics.
  18. Dawson, Chris & Henley, Andrew, 2012. "Something will turn up? Financial over-optimism and mortgage arrears," Economics Letters, Elsevier, vol. 117(1), pages 49-52.

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