The opportunity cost of debt aversion by Alejandro Martínez-Marquina and Mike Shi
By: Martínez Marquina, Alejandro
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Contributor(s): Shi, Mike.
Material type: 
ArticleSubject(s): DEUDORES Y ACREEDORES | AHORRO | RENTA FAMILIAR | ASPECTOS PSICOLOGICOS
In:
The American Economic Review v. 114, n. 4, April 2024, p. 1140-1172Summary: 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.
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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.
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