Events at CERGE-EI

Florian Exler, Ph.D.

University of Vienna, Austria

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Authors: Florian Exler, Johannes Poeschl

Abstract: What are the costs of household delinquency? To answer that question, we provide novel evidence on the dynamics of household balance sheets around delinquencies. To that end, we combine an administrative credit register featuring delinquency information with administrative data on household income and wealth. We document four facts. First, delinquency is partial. On average, households become delinquent on 30% of their debt. Second, delinquency is highly persistent. 60% of households that become delinquent are still so five years later. Third, delinquency is strategic. More than 90% of newly delinquent households have a disposable income above the subsistence level-and could thus afford to repay more. While ability to pay is important to predict delinquency, strategic motives matter more. Debtors with above median debt-to-income are 40% more likely to default than those with lower debt. Fourth, delinquency is costly. Relative to households with similar income and wealth, delinquent households cut back consumption by about 6% after delinquency. Our results suggest that the costs of delinquency are high and long-lasting.

JEL Classification: D14, G21, G51
Keywords: household debt, financial distress, delinquency, bankruptcy, default, credit cards, mortgages

Full Text: Balance Sheet Dynamics of Households in Financial Distress