Charles Grant

Household Debt Repayment Behaviour: What Role Do Institutions Play?

Household debt repayment behavior has been understudied, especially empirically, despite the heightened debate on rising household debt, personal bankruptcy filings, and arrears. In this paper, we use data from the European Community Household Panel to analyze the determinants of household debt arrears. The papers primary aim is to understand the role of institutions in household arrears by exploiting cross-country differences and the panel nature of the data set. We start our analysis by showing that falling into arrears has important long-term consequences for employment, self-employment, home-ownership, and health. Next, we show how arrears themselves are the result of adverse events that affect a household, such as bad health or unemployment. Finally, we show that there are important cross-country differences in how households react to these adverse events. These differences can be partly explained by local financial and judicial institutions. Indicators covering contract enforcement and the degree of credit information sharing are used to capture the costs associated with default. In particular, we show that while adverse shocks are highly important, the extent to which they affect household debt repayment depends crucially on the penalty for defaulting.

Evidence on the Insurance Effect of Redistributive Taxation

If households face uninsurable idiosyncratic earnings risk, theory predicts that redistributive tax and transfer systems have both an insurance and a distortionary effect. Exploiting the substantial variation of tax and transfer systems across U.S. states and over time, we investigate the necessary traces of these two effects in the data: that state-level measures of redistributive taxation should correlate negatively with the standard deviation and the mean of the within-state consumption distribution. We find that the first correlation is robust, supporting strongly the presence of an insurance effect. The distortionary effect can also be detected in the data, but it is less precisely estimated.

Redistributive Taxation and Personal Bankruptcy in US States

Personal bankruptcy regulation and redistributive taxes and transfers vary considerably across U.S. states and over time. Our hypothesis is that both policies are imperfect substitutes in insuring consumption of risk‐averse agents in incomplete markets. Exploiting data variation over time for 18 U.S. states for the period 1980–2003, we find considerable support for this hypothesis: redistributive taxation and bankruptcy exemptions are negatively correlated, and both policies are associated with more equal consumption growth.

Bounds on Repayment Behavior: Evidence for the Consumer Credit Market

How does the punishment for default affect repayment behavior? We use administrative data, provided by the leading Italian lender of unsecured credit to the household sector, to analyze households repayment behavior. Administrative data are particularly well suited to study what factors are responsible for default, but raise a fundamental econometric problem, since they identify the determinants of repayment behavior only for those who are granted credit. To overcome this problem, we provide upper and lower bounds on the determinants of repayment behavior. Moreover, we show how to use the restrictions from the theory to narrow the bounds.