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Measuring aversion to debt: an experiment among student loan candidates

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  • Caetano, Gregorio
  • Patrinos, Harry A.
  • Palacios, Miguel

Abstract

This paper reports the results of an experiment designed to test for the presence of debt aversion. The population who participated in the experiment were recent financial aid candidates and the experiment focused on student loans. The goal is to shed new light on different aspects of the perceptions with respect to debt. These perceptions can prevent agents from choosing an optimal portfolio or from undertaking attractive investment opportunities, such as in education. The study design disentangles two types of debt aversion: one that is studied in the previous literature, which encompasses both framing and labeling effects, and another that controls for framing effects and identifies only what we denote labeling debt aversion. The results suggest that participants in the experiment exhibit debt aversion, and most of the debt aversion is due to labeling effects. Labeling a contract as a"loan"'decreases its probability of being chosen over a financially equivalent contract by more than 8 percent. The analysis also provides evidence that students are willing to pay a premium of about 4 percent of the financed value to avoid a contract labeled as debt.

Suggested Citation

  • Caetano, Gregorio & Patrinos, Harry A. & Palacios, Miguel, 2011. "Measuring aversion to debt: an experiment among student loan candidates," Policy Research Working Paper Series 5737, The World Bank.
    • Handle: RePEc:wbk:wbrwps:5737
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    References listed on IDEAS

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    1. repec:cup:judgdm:v:16:y:2021:i:3:p:709-728 is not listed on IDEAS
    2. Claire Callender & Geoff Mason, 2017. "Does Student Loan Debt Deter Higher Education Participation? New Evidence from England," The ANNALS of the American Academy of Political and Social Science, , vol. 671(1), pages 20-48, May.
    3. Paolo Sodini & Stijn Van Nieuwerburgh & Roine Vestman & Ulf von Lilienfeld-Toal, 2016. "Identifying the Benefits from Homeownership: A Swedish Experiment," NBER Working Papers 22882, National Bureau of Economic Research, Inc.
    4. Thomas Meissner, 2016. "Intertemporal consumption and debt aversion: an experimental study," Experimental Economics, Springer;Economic Science Association, vol. 19(2), pages 281-298, June.
    5. Khoa A. Trinh & Nathan Berg & Arlene Garces‐Ozanne & Stephen Knowles, 2022. "Why Did They Not Borrow? Debt‐Averse Farmers In Rural Vietnam," The Developing Economies, Institute of Developing Economies, vol. 60(4), pages 228-260, December.
    6. Tracey, Belinda & Van Horen, Neeltje, 2021. "The consumption response to borrowing constraints in the mortgage market," Bank of England working papers 919, Bank of England.
    7. Suzanne Bartholomae & Jonathan J. Fox, 2021. "A Decade Review of Research on College Student Financial Behavior and Well-Being," Journal of Family and Economic Issues, Springer, vol. 42(1), pages 154-177, July.
    8. Brent J. Evans & Angela Boatman & Adela Soliz, 2019. "Framing and Labeling Effects in Preferences for Borrowing for College: An Experimental Analysis," Research in Higher Education, Springer;Association for Institutional Research, vol. 60(4), pages 438-457, June.
    9. Lebdaoui, Hind & Chetioui, Youssef, 2021. "Antecedents of consumer indebtedness in a majority-Muslim country: Assessing the moderating effects of gender and religiosity using PLS-MGA," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).
    10. 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).
    11. Thomas Meissner & David Albrecht, 2022. "Debt Aversion: Theory and Measurement," Papers 2207.07538, arXiv.org, revised Jul 2022.
    12. Marx, Benjamin M. & Turner, Lesley J., 2020. "Paralysis by analysis? Effects of information on student loan take-up," Economics of Education Review, Elsevier, vol. 77(C).
    13. Jia-Tao Ma & Lei Wang & Li-Na Chen & Quan He & Qing-Zhou Sun & Hong-Yue Sun & Cheng-Ming Jiang, 2021. "Comparing mixed intertemporal tradeoffs with pure gains or pure losses," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 16(3), pages 709-728, May.
    14. Travis P. Mountain & Namhoon Kim & Michael S. Gutter & Elizabeth Kiss & Soo Hyun Cho & Carrie L. Johnson, 2020. "An Exploration of Gender Bias, Framing, and Student Loan Decisions Through an Experimental Design," Journal of Family and Economic Issues, Springer, vol. 41(2), pages 350-363, June.
    15. Mahfuzur Rahman & Nurul Azma & Md. Abdul Kaium Masud & Yusof Ismail, 2020. "Determinants of Indebtedness: Influence of Behavioral and Demographic Factors," IJFS, MDPI, vol. 8(1), pages 1-14, February.
    16. Angela Boatman & Brent J. Evans, 2017. "How Financial Literacy, Federal Aid Knowledge, and Credit Market Experience Predict Loan Aversion for Education," The ANNALS of the American Academy of Political and Social Science, , vol. 671(1), pages 49-68, May.
    17. Brandén, Gunnar, 2022. "Replacing student grants with loans. Evidence from a Swedish policy reform," Working Paper Series 2022:7, IFAU - Institute for Evaluation of Labour Market and Education Policy.

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    More about this item

    Keywords

    Access to Finance; Debt Markets; Bankruptcy and Resolution ofFinancial Distress; Economic Theory&Research; Tertiary Education;
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