John Gathergood

Self-Control, Financial Literacy and Consumer Over-Indebtedness

This paper examines the relationship between self-control, financial literacy and over-indebtedness on consumer credit debt among a sample of U.K. consumers using data from a household survey. Both lack of self-control and financial illiteracy are positively associated with non-payment of consumer credit and self-reported excessive financial burdens of debt. Consumers who exhibit self-control problems are shown to make greater use of quick-access but high cost credit items such as store cards and payday loans. We also find consumers with self-control problems are more likely to suffer income shocks, credit withdrawals and unforeseen expenses on durables, suggesting that lack of self-control increases exposure to a variety of risks. In most specifications we find a stronger role for lack of self-control than for financial illiteracy in explaining consumer over-indebtedness.

Debt and Depression: Causal Links and Social Norm Effects

Individuals exhibiting problems repaying their debt obligations also exhibit much worse psychological health. Selection into problem debt on the basis of poor psychological health accounts for much of this difference. The causality between problem debt and psychological health may be two way. Using individual level UK panel data, local house price movements exogenous to individual households are used to establish the causality from problem mortgage debt to psychological health. In addition, the social norm effects of problem debt are investigated using local bankruptcy and repossession rates. Results indicate there are sizeable causal links and social norm effects in the debt–psychological health relationship.

Financial Literacy and Indebtedness: New Evidence for U.K. Consumers

We utilise questions concerning individual ‘debt literacy’ incorporated into market research data on households’ unsecured debt positions to examine the association between consumer credit and individual financial literacy. We examine the relationship between individual responses to debt literacy questions and household net worth, consumer credit use and over-indebtedness. We find that financially illiterate households have lower net worth, use higher cost credit and are more likely to report credit arrears or difficulty paying their debts. However, financially literate households are more likely to co-hold liquid savings and revolving consumer credit, suggesting that the co-holding might arise as a result of rational financial behaviour. We consider the potential endogeneity of financial literacy.

AN INSTRUMENTAL VARIABLE APPROACH TO UNEMPLOYMENT, PSYCHOLOGICAL HEALTH AND SOCIAL NORM EFFECTS

This empirical study presents estimates of the impact of unemployment on psychological health using U.K. household panel data. The causal impact of unemployment is established using instrumental variable methods. Psychological health is measured using both the General Household Questionnaire measure and also self-reported data on individual occurrences of anxiety-related conditions. We find evidence for positive selection into unemployment on the basis of poor psychological health. Nevertheless, panel instrumental variable estimates suggest a sizeable causal worsening of psychological health arising from unemployment. We also find evidence that the negative impact of unemployment can be largely mitigated by local labour market conditions: those entering unemployment in localities with higher unemployment rates suffer less deterioration in their psychological health.

House Price Shocks and Household Indebtedness in the United Kingdom

We use household panel data to explore the link between changes in house prices and household indebtedness (both secured on housing assets and unsecured) in the United Kingdom. We show that households which are borrowing-constrained by a lack of housing equity as collateral make greater use of unsecured debt such as credit cards or personal loans. In response to rising house prices, which relax this constraint, such households are more likely to refinance and to increase their indebtedness relative to unconstrained households. However, for most households, house price movements appear to have little impact on indebtedness.

House price growth, collateral constraints and the accumulation of homeowner debt in the United States

Using household panel data, we present evidence on the relationship between house price growth and household indebtedness among homeowners in the United States for the period 1999 to 2007. We posit an underlying mechanism whereby rising housing wealth allows households to increase their collateralised borrowing. Over the period, we find that roughly one-fifth of the growth in indebtedness among U.S. households can be explained by rising house prices. This housing wealth–indebtedness link is stronger among the minority of households that were initially “collateral constrained.”

House Prices, Wealth Effects and Labour Supply

We examine the impact of house prices on labour supply decisions using UK micro data. We combine household survey data with local level house price measures and controls for local labour demand. Our micro data also allows us to control for individual level income expectations. We find significant house price effects on labour supply, consistent with leisure being a normal good. Labour supply responses to house prices are concentrated among young married female owners and older owners. This finding suggests house prices affect the decisions of marginal workers in the economy. Our estimates imply house prices are economically important for the participation decisions for these workers.

Credit counseling: a substitute for consumer financial literacy?

Is financial literacy a substitute or complement for financial advice? We analyze the decision by consumers to seek financial advice in the form of credit counseling. Credit counseling is an important component of the consumer credit sector for consumers facing debt problems. Our analysis accounts for the endogeneity of an individuals financial situation to financial literacy, and the endogeneity of financial literacy to exposure to credit counseling. Results show counseling substitutes for financial literacy. Individuals with better literacy are 60% less likely to use credit counseling. These results suggest that credit counseling provides a safety net for poor financial literacy.

House Prices, Home Equity and Health

Home equity has a strong impact on individual health. In UK household panel data home equity lowers the likelihood of home owners exhibiting a broad range of medical conditions. This is due to increased use of private health care, reduced hours of work and increased exercise. Home equity, unlike income, does not increase risky health behaviours such as smoking and drinking. Home equity is highly pro-cyclical. The positive health effects of home equity gains on home owner health over the business cycle offset the negative effects of labour market conditions and work intensity as shown in US data by Ruhm (2000).

Self-Control, Financial Literacy and Co-Holding Puzzle

We use UK household survey data incorporating measures of financial literacy and behavioural characteristics to analyse the puzzling co-existence of high cost revolving consumer credit alongside low yield liquid savings in household balance sheets, which we term the ‘co-holding puzzle’. Approximately 20% of households in our sample co-hold, on average, £6,500 of revolving consumer credit alongside £8,000 of liquid savings. Co-holders are typically more financially literate, with above average income and education. However, we show co-holding is also associated with impulsive spending behaviour on the part of the household. Our results lend empirical support to theoretical models in which sophisticated households co-hold as a means of managing a self-control problem.