American Economic Review Vol. 114 No. 4 2024
The Opportunity Cost of Debt Aversion
Abstract
We provide evidence of the existence of debt aversion and its negative implications for financial decisions. In a new experimental design where subjects are assigned debt randomly, we quantify the opportunity cost of subjects’ debt-biased decisions. One-third of our participants neglect high returns and focus instead on debt repayments. In addition, borrowing to invest is 50 percent less likely when it leads to indebtedness. On average, participants perceive $1 less in debt as equivalent to $1.03 in savings. Hence, a debt-averse agent will undertake a 10 percent guaranteed investment only if the cost of borrowing does not exceed 6.80 percent.
- DOI
- 10.1257/aer.20221509
- Volume
- 114
- Issue
- 4
- Pages
- 1140-1172
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref