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Household debt overhang and human capital investment

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  • Manso, Gustavo
  • Rivera, Alejandro
  • Wang, Hui (Grace)
  • Xia, Han

Abstract

Unlike labor income, human capital is inseparable from individuals and does not completely accrue to creditors. Therefore, human capital investment is more resilient to “debt overhang” than labor supply. We develop a dynamic model displaying this difference. We find that while both labor supply and human capital investment are hump-shaped in household indebtedness, human capital investment declines less aggressively as indebtedness builds up. Importantly, because human capital is only valuable when households expect to supply labor, the greater reduction in labor supply due to debt overhang back-propagates into ex-ante human capital investment. We provide empirical support for the model.

Suggested Citation

  • Manso, Gustavo & Rivera, Alejandro & Wang, Hui (Grace) & Xia, Han, 2025. "Household debt overhang and human capital investment," Journal of Financial Economics, Elsevier, vol. 172(C).
    • Handle: RePEc:eee:jfinec:v:172:y:2025:i:c:s0304405x25001497
    DOI: 10.1016/j.jfineco.2025.104141
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    Keywords

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    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G50 - Financial Economics - - Household Finance - - - General
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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