Working Paper: NBER ID: w24272
Authors: Dean Karlan; Sendhil Mullainathan; Benjamin N. Roth
Abstract: A debt trap occurs when someone takes on a high-interest rate loan and is barely able to pay back the interest, and thus perpetually finds themselves in debt (often by re-financing). Studying such practices is important for understanding financial decision-making of households in dire circumstances, and also for setting appropriate consumer protection policies. We conduct a simple experiment in three sites in which we paid off high-interest moneylender debt of individuals. Most borrowers returned to debt within six weeks. One to two years .after intervention, treatment individuals were borrowing at the same rate as control households.
Keywords: debt traps; moneylender debt; market vendors; financial education; high-interest loans
JEL Codes: D12; D91; O12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| consumption shocks (E21) | borrowing behavior (G51) |
| self-control issues (D91) | borrowing behavior (G51) |
| lack of understanding of long-term costs (J32) | borrowing behavior (G51) |
| debt relief (F34) | borrowing behavior (G51) |
| financial education (G53) | borrowing behavior (G51) |
| debt relief and financial education (G51) | high-interest moneylender debt (G21) |
| borrowing behavior (G51) | high-interest moneylender debt (G21) |
| debt relief (F34) | likelihood of borrowing at high interest rates (G51) |
| financial education (G53) | likelihood of borrowing at high interest rates (G51) |