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Returning to the nest: Debt and parental co-residence among young adults

Lisa J. Dettling and Joanne W. Hsu

Labour Economics, 2018, vol. 54, issue C, 225-236

Abstract: In standard life-cycle models, borrowing enables young adults to smooth consumption, but for those who are indebted and face high borrowing costs, parental co-residence could serve as an alternative smoothing mechanism. Using panel data derived from credit reports, we begin by documenting an association between debt characteristics – including credit risk, delinquency and loan balances on student loans, auto loans and credit cards – and subsequent entry into, and durations in parental co-residence. We find relationships consistent with parental co-residence as a smoothing mechanism for young adults facing borrowing constraints. We then formally test the hypothesis that credit accessibility affects co-residence choice by analyzing plausibly exogenous reductions in credit card limits initiated by banks during the Great Recession. We find that young adults who experienced limit reductions were 5% more likely to enter co-residence, and stayed 4% longer in co-residence. The effects of credit limit reductions were larger for young adult borrowers who were closer to their credit limit before the reduction.

Keywords: Consumer debt; Household formation; Credit constraints; Boomerang generation (search for similar items in EconPapers)
Date: 2018
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