Household debt overhang and human capital investment

Gustavo Manso, Alejandro Rivera, Wang, Hui (Grace) and Han Xia

Journal of Financial Economics, 2025, vol. 172, issue C

Abstract: Unlike labor income, human capital is inseparable from individuals and does not completely accrue to creditors. Therefore, human capital investment is more resilient to “debt overhang” than labor supply. We develop a dynamic model displaying this difference. We find that while both labor supply and human capital investment are hump-shaped in household indebtedness, human capital investment declines less aggressively as indebtedness builds up. Importantly, because human capital is only valuable when households expect to supply labor, the greater reduction in labor supply due to debt overhang back-propagates into ex-ante human capital investment. We provide empirical support for the model.

Keywords: Household indebtedness; Human capital investment; Labor skills acquisition; Debt overhang; Household default (search for similar items in EconPapers)
JEL-codes: G28 G50 G51 J20 J24 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:172:y:2025:i:c:s0304405x25001497

DOI: 10.1016/j.jfineco.2025.104141

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