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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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    Cited by:

    1. Paolo Sodini & Stijn Van Nieuwerburgh & Roine Vestman & Ulf von Lilienfeld-Toal, 2016. "Identifying the Benefits from Home Ownership: A Swedish Experiment," NBER Working Papers 22882, National Bureau of Economic Research, Inc.
    2. Thomas Meissner, 2016. "Intertemporal consumption and debt aversion: an experimental study," Experimental Economics, Springer;Economic Science Association, vol. 19(2), pages 281-298, June.
    3. 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.
    4. 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).
    5. 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).
    6. 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).
    7. 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.
    8. Mahfuzur Rahman & Nurul Azma & Md. Abdul Kaium Masud & Yusof Ismail, 2020. "Determinants of Indebtedness: Influence of Behavioral and Demographic Factors," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 8(1), pages 1-14, February.

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    Keywords

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