"Household Debt And Arrears: What Role Do Institutions Play?"
Abstract:
Despite the heightened debate on rising household debt, personal bankruptcy filings,
and arrears, household debt repayment behaviour has been understudied, especially at
the empirical level. This paper uses data from the European Community Household
Panel to analyze the determinants of household debt arrears. The paper’s 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 first analyze how the propensity
to fall into arrears is affected by adverse events, while controlling for other observable
demographic characteristics. We then show how the effects of the adverse events
themselves vary across countries, depending on local financial and judicial institutions,
which captures the differences in punishment and cost of default. Our findings indicate
that adverse events matter, and the extent to which they do depends on the punishment
associated with default. For example, our results show that in almost all cases
unemployment shocks lead to a failure to repay loans on time—but all the more so in
countries with limited information sharing, such as France. Similarly, where creditor
rights are very poor, as in Finland and in Greece, negative earnings shocks are more
likely to lead to household arrears.
