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Over-indebtedness in Households: Measurement and Determinants

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  • Rodrigo Cifuentes
  • Felipe Martínez

Abstract

This paper analyzes the properties of different indicators of over-indebtedness of house- holds. In particular, we compare a group of indicators where one is based on households’ self-assessment and others on financial indicators, with the intent to find the most informative and comprehensive. We then study the determinants of over-indebtedness of households. We use data coming from the 2014 wave of the Survey of Household Finances in Chile. In the first part of the paper, we show that the self-reported measure proves to provide a more comprehensive view of household over-indebtedness than the one obtained from the financial indicators traditionally used for this purpose. In the second part, we estimate a bivariate probit with sample selection to analyze what factors are associated with the over-indebtedness condition. We find that income is an important factor for over-indebtedness, but it does not affect the probability of holding debt. In addition, we show that temporary workers are more prone to over-indebtedness than workers with permanent contracts. Finally, one of the most important results of our paper is that we show that an unexpected shock has a significant effect on both holding debt and reporting being over-indebted. Our results indicate that an appropriate evaluation of the over-indebted condition should consider more than traditionally used financial indicators. We also provide arguments in favor of a comprehensive credit register that would help credit suppliers to better manage credit risks.

Suggested Citation

  • Rodrigo Cifuentes & Felipe Martínez, 2020. "Over-indebtedness in Households: Measurement and Determinants," Working Papers Central Bank of Chile 869, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:869
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