Non-Cognitive Abilities and Financial Delinquency: The Role of Self-Efficacy in Avoiding Financial Distress

Camelia Kuhnen and Brian Melzer

No 23028, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We investigate a novel determinant of household financial delinquency, namely, people’s subjective expectations regarding the cost-benefit trade-off in default decisions. These expectations are determined by individuals’ self-efficacy, which is a non-cognitive ability that measures how strongly people believe that their effort will influence future outcomes. Using longitudinal household survey data, we show that people with higher self-efficacy, measured earlier in life, are less likely to be financially delinquent later on and to face consequences such as losing assets or access to traditional credit markets, are more likely to prepare for dealing with potential adverse shocks such as a job loss or a health event, and when faced with such shocks, are less likely to become financially delinquent. Complementing prior findings regarding the effects of cognitive abilities, financial literacy and education on economic behavior, our evidence suggests that non-cognitive abilities have an important role in household financial decision making.

JEL-codes: D03 D1 D14 D84 G02 (search for similar items in EconPapers)
Date: 2017-01
New Economics Papers: this item is included in nep-neu
Note: AP
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Citations: View citations in EconPapers (8)

Published as Camelia M. Kuhnen & Brian T. Melzer, 2018. "Noncognitive Abilities and Financial Delinquency: The Role of Self‐Efficacy in Avoiding Financial Distress," Journal of Finance, American Finance Association, vol. 73(6), pages 2837-2869, December.

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Journal Article: Noncognitive Abilities and Financial Delinquency: The Role of Self‐Efficacy in Avoiding Financial Distress (2018)
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