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Debt and Risk Preference: A Household Level Analysis

Brown, S., Garino, G., Simmons, P. and Taylor, K. (2008) Debt and Risk Preference: A Household Level Analysis. Working Paper. Department of Economics, University of Sheffield ISSN 1749-8368


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We explore the relationship between risk preference and the level of unsecured debt at the household level within the context of a two period theoretical framework, which predicts that debt is a function of risk aversion. We test the predictions of our theoretical framework for a sample of households drawn from the U.S. Panel Study of Income Dynamics (PSID) and the U.S. Survey of Consumer Finances (SCF). Using a sequence of questions from the 1996 PSID and the 1989 to 2004 SCF, we construct measures of risk preference allowing us to explore the implications of interpersonal differences in risk preference for the accumulation of unsecured debt at the household level. Our empirical findings, which accord with our theoretical priors, suggest that risk preference is an important determinant of the level of unsecured debt acquired at the household level with risk aversion serving to reduce the level of unsecured debt accumulated by households.

Item Type: Monograph (Working Paper)
Copyright, Publisher and Additional Information: The Sheffield Economics Research Paper (SERP) series offers a forum for the research output of the academic staff and research students of the Department of Economics, University of Sheffield. Papers are reviewed for quality and presentation by a departmental editor. However, the contents and opinions expressed remain the responsibility of the authors. All papers may be downloaded free on the understanding that the contents are preliminary and therefore permission from the author(s) should be sought before they are referenced.
Keywords: Debt, Financial Assets, Risk Aversion, Risk Preference
Institution: The University of Sheffield
Academic Units: The University of Sheffield > Faculty of Social Sciences (Sheffield) > Department of Economics (Sheffield) > Sheffield Economics Research Papers Series
Depositing User: Repository Officer
Date Deposited: 22 Oct 2009 15:41
Last Modified: 06 Jun 2014 10:51
Published Version: http://www.shef.ac.uk/economics/research/serps/yea...
Status: Published
Publisher: Department of Economics, University of Sheffield
Identification Number: Sheffield Economic Research Paper Series 2008005
URI: http://eprints.whiterose.ac.uk/id/eprint/9979

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