Tim de Silva, Massachusetts Institute of Technology
Abstract: Student loans with income-contingent repayment insure borrowers against income risk but can reduce their incentives to earn more. Using a change in Australia’s income-contingent repayment schedule, I show that borrowers reduce their labor supply to lower their repayments. These responses are larger among borrowers with more hourly flexibility, a lower probability of repayment, and tighter liquidity constraints. I use these responses to estimate a dynamic model of labor supply with frictions that generate imperfect adjustment. My estimates imply that the labor supply responses to income-contingent repayment decrease the optimal amount of insurance but are too small to justify fixed repayment contracts. Moving from a fixed repayment contract to a constrained-optimal income-contingent loan increases welfare by the equivalent of a 1.3% increase in lifetime consumption at no additional fiscal cost.
Discussant: Marina Gertsberg, University of Melbourne
Abstract: This paper investigates how the expansion of social insurance affects households’ accumulation of debt. Insurance can reduce reliance on debt by lessening the financial impact of adverse events such as illness and job loss. But it can also weaken the motive to self-insure through savings, and households’ improved financial resilience can increase access to credit. Using data on 10 million people and a quasi-experimental research design, we estimate the causal effect of expanded insurance on household debt, exploiting ZIP-code level heterogeneity in exposure to the staggered expansions of one of the largest US social insurance programs: Medicaid. We find that a 1 percentage point increase in a ZIP code’s Medicaid-eligible population increases credit card borrowing by 0.46%. Decomposing this effect in a model of household borrowing, we show that increased credit supply in response to households’ improved financial resilience drives the rise in borrowing and contributed 32% of the net welfare gains of expanding Medicaid.
Discussant: Joy Tianjiao Tong, University of Western Ontario
Abstract: Debt moratoria that allow borrowers to postpone loan payments are a frequently used tool intended to soften the impact of economic crises. This paper reports results from a nationwide experiment with a large consumer lender in India, designed to study how debt forbearance offers affect loan repayment and banking relationships. In the experiment, borrowers receive forbearance offers that are presented either as an initiative of their lender or the result of government regulation. The results show that delinquent borrowers who are offered a debt moratorium by their lender are 4 percentage points (7 percent) less likely to default on their loan, while forbearance has no effect on repayment if it is granted by the regulator. Borrowers who are offered forbearance by their lender also have causally higher demand for future interactions with the lender: in a follow-up experiment conducted several months after the main intervention demand for a non-credit product offered by the lender is 10 percentage points (27 percent) higher among customers who were offered repayment flexibility by the lender than among customers who received a moratorium offer presented as an initiative of the regulator. Overall, the results suggest that, rather than generating moral hazard, debt forbearance can improve loan repayment and support the creation of longer-term banking relationships not only for liquidity but also for relational contracting reasons. This provides a rationale for offering repayment flexibility even in settings where lenders are not required to provide forbearance.
