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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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    More about this item

    Keywords

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

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