The Opportunity Cost of Debt Aversion

Alejandro Martínez-Marquina and Mike Shi

American Economic Review, 2024, vol. 114, issue 4, 1140-72

Abstract: We provide evidence of the existence of debt aversion and its negative implications for financial decisions. In a new experimental design where subjects are assigned debt randomly, we quantify the opportunity cost of subjects' debt-biased decisions. One-third of our participants neglect high returns and focus instead on debt repayments. In addition, borrowing to invest is 50 percent less likely when it leads to indebtedness. On average, participants perceive $1 less in debt as equivalent to $1.03 in savings. Hence, a debt-averse agent will undertake a 10 percent guaranteed investment only if the cost of borrowing does not exceed 6.80 percent.

JEL-codes: C91 D91 G51 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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DOI: 10.1257/aer.20221509

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