A pecking order of household finance

Declan French

Oxford Economic Papers, 2025, vol. 77, issue 4, 990-1005

Abstract: How do households cope with economic shocks? In this article, I provide empirical evidence and theoretical grounding for a pecking order of coping methods using data from the UK Understanding Society COVID-19 Study. I find that there is a typical household finance ordering of responses to income loss. Almost two-thirds (65 per cent) of households first reduce spending then these households typically proceed to draw down savings (59 per cent) and their most common next response is relying on family and friends (21 per cent). Deviations from this ordering occur because certain coping methods are often unavailable—those households not reducing spending are already struggling and those without savings have nothing to drawdown. Receiving financial assistance from family and friends is also more common than some authors suggest. Lastly, I find that the costs of informal borrowing are influenced by plausible social factors. My results are informative for policies to promote resilience during crises.

Keywords: household finance; liquidity management; Brownian motion; informal credit; family loans (search for similar items in EconPapers)
JEL-codes: G21 O16 O17 (search for similar items in EconPapers)
Date: 2025
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