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Rational but Not Prescient: Borrowing during the Fracking Boom

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Abstract

To study how income expectations affect borrowing, we use leased natural gas rights in Texas in the mid-2000s, which created potential for future leaseholder income without loosening credit constraints. In matching 11,000 leaseholders with non-leaseholders selected from a screened pool of 5.2 million, we find that the average leaseholder borrowed $13,000 more over the 2003–08 leasing boom. A consumption-smoothing model indicates that leaseholders’ income expectations aligned with forecasts of persistently high natural gas prices. Yet, the unforeseeable success of fracking was associated with reduced prices and increased bankruptcies during 2009–19 for non-prime leaseholders as well as fracking firms.

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  • Daniel Berkowitz & Andrew J. dup Boslett & Jason Brown & Jeremy G. Weber, 2022. "Rational but Not Prescient: Borrowing during the Fracking Boom," Research Working Paper RWP 2022-05, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:94352
    DOI: 10.18651/RWP2022-05
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    More about this item

    Keywords

    Income shocks; Consumer debt; Bankruptcy; Resource booms;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)

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