Targeted Debt Relief and the Origins of Financial Distress: Experimental Evidence from Distressed Credit Card Borrowers

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 16.05.2017, 12:15 - 13:30

   

Presentation by 

Will S. Dobbie (Princeton University)
   

Abstract:

We study the drivers of financial distress using a large-scale field experiment that offered randomly selected borrowers a combination of (i) immediate payment reductions to target short-run liquidity constraints and (ii) delayed debt write-downs to target long-run debt constraints. We identify the separate effects of the payment reductions and write-downs using variation from both the experiment and cross-sectional differences in treatment intensity. Surprisingly, we find that the debt write-downs significantly improved both financial and labor market outcomes despite not taking effect until three to five years after the randomization. In sharp contrast, there were no positive effects of the immediate payment reductions. These results run counter to the widespread view that financial distress is largely the result of short-run constraints.

   
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