Almenberg, Johan () (Dept. of Economic Statistics, Stockholm School of Economics) Karapetyan, Artashes (Empirical Institute of Economics and SFI, University of Zürich)
Abstract
We use a survey to identify a consumer bias with regard to different sources of debt-financing. Less salient debt may generate psychological benefits. This should be weighed against the possible economic costs of a sub-optimal capital structure, but low levels of financial literacy make it unlikely that all households perceive the full economic costs. As a result there is a bias in favour of less salient debt. In a market with limited scope for arbitrage this consumer bias is likely to generate inefficiencies. We examine such a market in both theory and practice. The predictions of our model are given strong support by market data.
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Length: 43 pages Date of creation: 10 May 2009 Date of revision: Handle: RePEc:hhs:hastef:0718
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