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  5. The Opportunity Cost of Debt Aversion

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

The Opportunity Cost of Debt Aversion

  • Alejandro Martínez-Marquina
  • Mike Shi
American Economic Review
vol. 114, no. 4, April 2024
(pp. 1140–72)
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Abstract

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.

Citation

Martínez-Marquina, Alejandro, and Mike Shi. 2024. "The Opportunity Cost of Debt Aversion." American Economic Review, 114 (4): 1140–72. DOI: 10.1257/aer.20221509

Additional Materials

JEL Classification

  • C91 Design of Experiments: Laboratory, Individual
  • D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
  • G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth