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Does everyone accept a free lunch? Decision making under (almost) zero cost borrowing

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  • Michael Insler

    ()
    (United States Naval Academy)

  • Pamela Schmitt

    ()
    (United States Naval Academy)

  • Jake Compton

    ()
    (United States Navy)

Abstract

We examine decision making by a group of college students who have the opportunity to take out a sizable, very low-interest, non-credit dependent loan which, if simply invested in low-risk assets, would effectively yield a free lunch in net interest earnings. We exploit this natural experiment to study the characteristics of those willing and unwilling to take the loan. We characterize the latter as debt averse, and for those who accept the loan, we also consider whether they anticipate repaying it early. In particular, we use simple linear and non-linear binary choice models to explore how these two decisions relate to individual and family demographics as well as socio-economic characteristics, personality traits (as measured by the Myers-Briggs Type Indicator), cognitive ability (as measured by the Cognitive Reflection Test), and intellectual ability (as measured by SAT scores and grade point average). We find no consistent relationships between debt aversion and intellectual ability or gender. Individuals willing to accept the loan tend to have prior debt, longer planning horizons, come from middle-income families, and may have higher cognitive ability.

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File URL: http://www.usna.edu/EconDept/RePEc/usn/wp/usnawp42.pdf
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Bibliographic Info

Paper provided by United States Naval Academy Department of Economics in its series Departmental Working Papers with number 42.

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Length: 23 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:usn:usnawp:42

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  1. Michael Insler & Pamela Schmitt & Jake Compton, 2013. "“Open line of credit:” Under no borrowing constraints, how do young adults invest?," Departmental Working Papers 41, United States Naval Academy Department of Economics.
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