Borrowing Based on Great Expectations: Evidence from the Origins of Fracking

Daniel Berkowitz, Andrew J. dup Boslett, Jason Brown and Jeremy Weber

No RWP 22-05, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: We use the origins of fracking to study how people respond to a large and uncertain permanent income shock. Following the arrival of news in 2003 that fracking was commercially viable, the average person owning rights to natural gas deposits in the Barnett Shale could plausibly expect to earn a present value of about $33,000 from leasing the rights to energy firms. Anticipating the income, people who signed leases after 2006 borrowed $5,400 more than non-leaseholders as of 2006. Leases not yet signed could not be collateralized, suggesting that expectations of increased permanent income rather than relaxed credit constraints drove leaseholder borrowing. A consumption smoothing model that uses observed well productivity and Hotelling’s rule for pricing non-renewable resources suggests that borrowing as of 2006 was rational to conservative. When natural gas prices unexpectedly crashed during 2009-2019, leaseholders reduced their debt and had delinquency and bankruptcy rates that indicate limited financial distress, suggesting that their borrowing prior to signing a lease was not impulsive.

Keywords: Income shocks; Consumer debt; Bankruptcy; Resource booms (search for similar items in EconPapers)
JEL-codes: D12 G51 Q33 (search for similar items in EconPapers)
Pages: 52
Date: 2022-05-23, Revised 2025-01-13
New Economics Papers: this item is included in nep-ban and nep-ene
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DOI: 10.18651/RWP2022-05

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