Consumer over-indebtedness is a growing problem globally. The economic and social consequences are not only severe for consumers, but a large number of over-indebted households can also threaten the financial stability of an entire economy. Yet, the determinants of over-indebtedness are still not well understood. The study of BCCP Doctoral Student Melanie Koch and her co-authors Theres Klühs and Wiebke Stein investigates the role of high income expectations for household over-indebtedness. They conduct an extensive survey analysis among rural households in Northeastern Thailand, which are part of a larger panel study. Among emerging markets, Thailand has the highest debt-to-GDP ratio in the world. In rural Thailand, around three-quarters of the households have at least one outstanding loan, while every fifth household can be regarded as over-indebted.
The survey focuses on household finances, including savings, loans, objective and subjective over-indebtedness indicators, as well as income expectations. It is complemented with a lab-in-the-field experiment, in which respondents make a consumption decision based on a mere payoff expectation that is varied exogenously. The results show that households with high income expectations are significantly more over-indebted than households with rather neutral or negative expectations. Additionally, households that are very certain about their future income realization are also more over-indebted. The analysis controls for important factors supposedly affecting over-indebtedness, like current income and experienced income shocks. Results from the experiment support the empirical relationship between (too) high expectations and overspending. Moreover, those who are over-indebted in real life are also those who overspend in the lab.
Low income households are especially at risk to become over-indebted as they are, in general, more vulnerable to income shocks. They often face immense income uncertainty. Expectation formation is especially difficult in uncertain environments, where income depends, for example, on future harvests or the extension of employment contracts. This uncertainty can lead to overoptimistic expectations and, subsequently, excessive loan take-up. Still, this is not purely a demand-side problem as excessive borrowing is clearly promoted if credits are granted without sufficient screening, which is exactly the case in rural Thailand. Moreover, even in countries like Germany, where difficulties to repay loans are on the rise, a similar pattern is observable. Increasingly, consumer credit is not just offered by conventional banks and creditworthiness checks are less detailed than before. Income uncertainty is often not taken into account, especially not by firms offering loans online.
Unforeseen crises, like the Corona pandemic, highlight the potential negative consequences of high income expectations and overoptimistic borrowing. Those who have too much credit right now, potentially caused by high income expectations, are at a greater risk of becoming trapped in over-indebtedness.