Working Paper: NBER ID: w23545
Authors: Will Dobbie; Jae Song
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 debt write-downs using variation from both the experiment and cross-sectional differences in treatment intensity. We find that the debt write-downs significantly improved both financial and labor market outcomes despite not taking effect for three to five years. In sharp contrast, there were no positive effects of the more immediate payment reductions. These results run counter to the widespread view that financial distress is largely the result of short-run constraints.
Keywords: debt relief; financial distress; credit card borrowers; field experiment
JEL Codes: D14; J22; J31; K35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| debt writedowns (G33) | financial and labor market outcomes (J49) |
| debt writedowns (G33) | likelihood of completing a repayment program (G33) |
| debt writedowns (G33) | bankruptcy filings (K35) |
| immediate payment reductions (E62) | collections debt (F34) |
| immediate payment reductions (E62) | likelihood of completing a repayment program (G33) |