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

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Author Info
Marques Benton
Stephan Meier
Charles Sprenger

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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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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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Related research
Keywords: Consumer credit ; Saving and investment;

References listed on IDEAS
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  1. Kathleen W. Johnson, 2004. "Convenience or necessity? understanding the recent rise in credit card debt," Finance and Economics Discussion Series 2004-47, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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    Other versions:
  3. Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, vol. 89(4), pages 947-958, September. [Downloadable!] (restricted)
  4. Oren Bar-Gill, . "Seduction by Plastic," American Law & Economics Association Annual Meetings 1013, American Law & Economics Association. [Downloadable!]
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  8. Stephan Meier & Charles Sprenger, 2007. "Impatience and credit behavior: evidence from a field experiment," Working Papers 07-3, Federal Reserve Bank of Boston. [Downloadable!]
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  10. Huffman, David & 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). [Downloadable!]
  11. Nava Ashraf & Dean Karlan & Wesley Yin, 2006. "Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 635-672, May. [Downloadable!] (restricted)
    Other versions:
  12. David B. Gross & Nicholas S. Souleles, 2002. "Do Liquidity Constraints And Interest Rates Matter For Consumer Behavior? Evidence From Credit Card Data," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 149-185, February. [Downloadable!] (restricted)
    Other versions:
  13. Shapiro, Jesse M., 2005. "Is there a daily discount rate? Evidence from the food stamp nutrition cycle," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 303-325, February. [Downloadable!] (restricted)
    Other versions:
  14. John Karl Scholz & Ananth Seshadri & Surachai Khitatrakun, 2004. "Are Americans Saving "Optimally" for Retirement?," NBER Working Papers 10260, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  15. John Ameriks & Andrew Caplin & John Leahy & Tom Tyler, 2004. "Measuring Self-Control," NBER Working Papers 10514, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Marianne Bertrand & Sendhil Mullainathan & Eldar Shafir, 2004. "A Behavioral-Economics View of Poverty," American Economic Review, American Economic Association, vol. 94(2), pages 419-423, May. [Downloadable!]
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