Measuring Aversion to Debt : An Experiment among Student Loan Candidates
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 s...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110726094406 http://hdl.handle.net/10986/3499 |
| Summary: | 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. |
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