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Intertemporal Consumption and Debt Aversion: An Experimental Study

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Abstract

This paper tests how subjects behave in an intertemporal consumption/saving experiment when borrowing is allowed and whether subjects treat debt differently than savings. Two treatments create environments where either saving or borrowing is required for optimal consumption. Since both treatments share the same optimal consumption levels, observed consumption choices can be directly compared across treatments. The experimental findings imply that deviations from optimal behavior are higher when subjects have to borrow than when they have to save in order to consume optimally, suggesting debt aversion. Signifiant under-consumption is observed when subjects have to borrow in order to reach optimal consumption. In line with previous experiments, weak evidence is found suggesting that subjects over-consume when saving is necessary for optimal consumption.

    Research areas

  • Laboratory experiment, Intertemporal consumption, Consumption smoothing, Debt aversion

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Details

Original languageEnglish
Pages (from-to)281–298
Number of pages18
JournalExperimental Economics
Volume19
Issue number2
DOIs
Publication statusPublished - Jun 2016