Relative Income and Indebtedness: Evidence from Panel Data
We examine patterns of indebtedness in the Panel Study of Income Dynamics, focusing on the period surrounding the housing bubble and its aftermath (i.e. 1999-2009). Leverage increased most quickly among lower income households during this period. We findnd that leverage grew faster for households with lower relative income compared to other households in similar demographic groups. We also find that changes in leverage for a given household were strongly associated with lower relative income within a state, controlling for own income. A one standard deviation increase in relative income is associated with a 50 to 100 percent increase in the growth in leverage. Together, these findings provide evidence for the thesis that the rising indebtedness of households in the U.S is related to high levels of inequality, and that `Veblen effects' whereby relative income matters for individual well-being and decisions may contribute to rising household indebtedness.
|Date of creation:||Sep 2013|
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