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Overborrowing and undersaving: lessons and policy implications from research in behavioral economics

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  • Marques Benton
  • Stephan Meier
  • Charles Sprenger

Abstract

The U.S. household carries over $7,500 in uncollateralized debt and likely saves at a negative rate. There is a growing body of evidence that this borrowing and saving behavior may not, as assumed by standard economics, be the product of rational financial planning. This paper discusses insights from behavioral economics on how self-control problems could play a crucial role in determining such financial outcomes. It is important to note that self-control problems, as defined in this paper, are thought of as an issue affecting all people, not just those involved in our specific research. ; The paper reports results from a field study targeted to low-to-moderate income individuals conducted in Dorchester, MA. It links measured self-control to borrowing and savings outcomes taken from individual credit reports and survey questions respectively. We find that self-control problems are associated with higher borrowing, specifically on credit cards, and lower savings of income tax refunds. The paper discusses how policy prescriptions built around addressing self-control issues could prove helpful in improving financial outcomes.

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File URL: http://www.bostonfed.org/commdev/pcadp/2007/pcadp0704.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Boston in its series Public and Community Affairs Discussion Papers with number 2007-4.

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Date of creation: 2007
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Handle: RePEc:fip:fedbpc:2007-4

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Keywords: Consumer credit ; Saving and investment;

References

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  1. John Karl Scholz & Ananth Seshadri & Surachai Khitatrakun, 2006. "Are Americans Saving "Optimally" for Retirement?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 114(4), pages 607-643, August.
  2. Melvin Stephens Jr., 2002. "'3rd of tha Month': Do Social Security Recipients Smooth Consumption Between Checks?," NBER Working Papers 9135, National Bureau of Economic Research, Inc.
  3. David B. Gross & Nicholas S. Souleles, 2001. "Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data," NBER Working Papers 8314, National Bureau of Economic Research, Inc.
  4. Shapiro, Jesse M., 2005. "Is there a daily discount rate? Evidence from the food stamp nutrition cycle," Journal of Public Economics, Elsevier, Elsevier, vol. 89(2-3), pages 303-325, February.
  5. Stephan Meier & Charles Sprenger, 2007. "Impatience and credit behavior: evidence from a field experiment," Working Papers, Federal Reserve Bank of Boston 07-3, Federal Reserve Bank of Boston.
  6. Esther Duflo & William Gale & Jeffrey Liebman & Peter Orszag & Emmanuel Saez, 2006. "Saving Incentives for Low- and Middle-Income Families: Evidence from a Field Experiment with H&R Block," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 121(4), pages 1311-1346, November.
  7. Bertrand, Marianne & Shafir, Eldar & Mullainathan, Sendhil, 2004. "A Behavioral Economics View of Poverty," Scholarly Articles 2907437, Harvard University Department of Economics.
  8. Nava Ashraf & Dean S. Karlan & Wesley Yin, 2005. "Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines," Working Papers, Economic Growth Center, Yale University 917, Economic Growth Center, Yale University.
  9. Matthew Rabin & Ted O'Donoghue, 1999. "Doing It Now or Later," American Economic Review, American Economic Association, American Economic Association, vol. 89(1), pages 103-124, March.
  10. Christopher D. Carroll & Lawrence H. Summers, 1991. "Consumption Growth Parallels Income Growth: Some New Evidence," NBER Chapters, in: National Saving and Economic Performance, pages 305-348 National Bureau of Economic Research, Inc.
  11. Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, American Economic Association, vol. 89(4), pages 947-958, September.
  12. Stefano DellaVigna & Ulrike Malmendier, 2006. "Paying Not to Go to the Gym," American Economic Review, American Economic Association, American Economic Association, vol. 96(3), pages 694-719, June.
  13. John Ameriks & Andrew Caplin & John Leahy & Tom Tyler, 2004. "Measuring Self-Control," NBER Working Papers 10514, National Bureau of Economic Research, Inc.
  14. Oren Bar-Gill, . "Seduction by Plastic," American Law & Economics Association Annual Meetings, American Law & Economics Association 1013, American Law & Economics Association.
  15. David Laibson & Andrea Repetto & Jeremy Tobacman, 2000. "A Debt Puzzle," NBER Working Papers 7879, National Bureau of Economic Research, Inc.
  16. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2003. "Optimal Defaults," American Economic Review, American Economic Association, American Economic Association, vol. 93(2), pages 180-185, May.
  17. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  18. William G. Gale & John Sabelhaus, 1999. "Perspectives on the Household Saving Rate," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1), pages 181-224.
  19. Huffman, David B. & Barenstein, Matias, 2004. "Riches to Rags Every Month? The Fall in Consumption Expenditures Between Paydays," IZA Discussion Papers 1430, Institute for the Study of Labor (IZA).
  20. Kathleen W. Johnson, 2004. "Convenience or necessity? understanding the recent rise in credit card debt," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2004-47, Board of Governors of the Federal Reserve System (U.S.).
  21. Cass R. Sunstein & Richard H. Thaler, 2003. "Libertarian paternalism is not an oxymoron," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 48(Jun).
  22. repec:reg:wpaper:320 is not listed on IDEAS
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