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Effects of the Menu of Loan Contracts on Borrower Behavior

Author

Listed:
  • Katharine G. Abraham

    (Department of Economics and Joint Program in Survey Methodology, University of Maryland, College Park, Maryland 20742; National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Emel Filiz-Ozbay

    (Department of Economics, University of Maryland, College Park, Maryland 20742)

  • Erkut Y. Ozbay

    (Department of Economics, University of Maryland, College Park, Maryland 20742)

  • Lesley J. Turner

    (Department of Economics, Vanderbilt University, Nashville, Tennessee 37235; National Bureau of Economic Research, Cambridge, Massachusetts 02138)

Abstract

We study how the menu of contracts presented to a decision maker—including contracts she may be precluded from choosing—affects her choice of remunerative but risky actions relative to lower paying, less risky alternatives. We do this through a series of laboratory experiments modeled after the loan repayment options offered to U.S. student borrowers, analyzing borrowers’ task (career) choices in settings that vary the menu of available and unavailable loan repayment plans and knowledge of unavailable options. In these experiments, we observe behavior that is inconsistent with predictions from standard economic models in which agents can easily make complex decisions and each alternative in a choice set is evaluated independently of other potential options. Instead, we provide evidence that expanding the menu of choices or making an agent aware of choices that she has been denied can affect how a contract is valued. Our empirical findings are most consistent with behavioral models that allow for anticipated regret over a choice that turns out to be suboptimal ex post or preferences for simplicity and gratitude for being unburdened from having to make a choice.

Suggested Citation

  • Katharine G. Abraham & Emel Filiz-Ozbay & Erkut Y. Ozbay & Lesley J. Turner, 2022. "Effects of the Menu of Loan Contracts on Borrower Behavior," Management Science, INFORMS, vol. 68(1), pages 509-528, January.
    • Handle: RePEc:inm:ormnsc:v:68:y:2022:i:1:p:509-528
    DOI: 10.1287/mnsc.2020.3914
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    References listed on IDEAS

    as
    1. Abraham, Katharine G. & Filiz-Ozbay, Emel & Ozbay, Erkut Y. & Turner, Lesley J., 2020. "Framing effects, earnings expectations, and the design of student loan repayment schemes," Journal of Public Economics, Elsevier, vol. 183(C).
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