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  3. American Economic Review
  4. April 2020
  5. Targeted Debt Relief and the Origins of Financial Distress: Experimental Evidence from Distressed Credit Card Borrowers

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Targeted Debt Relief and the Origins of Financial Distress: Experimental Evidence from Distressed Credit Card Borrowers

  • Will Dobbie
  • Jae Song
American Economic Review
vol. 110, no. 4, April 2020
(pp. 984–1018)
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Abstract

We study the drivers of financial distress using a large-scale field experiment that offered randomly selected borrowers a combination of (i) immediate payment reductions to target short-run liquidity constraints and (ii) delayed interest write-downs to target long-run debt constraints. We identify the separate effects of the payment reductions and interest write-downs using both the experiment and cross-sectional variation in treatment intensity. We find that the interest write-downs significantly improved both financial and labor market outcomes, despite not taking effect for three to five years. In sharp contrast, there were no positive effects of the more immediate payment reductions. These results run counter to the widespread view that financial distress is largely the result of short-run constraints.

Citation

Dobbie, Will, and Jae Song. 2020. "Targeted Debt Relief and the Origins of Financial Distress: Experimental Evidence from Distressed Credit Card Borrowers." American Economic Review, 110 (4): 984–1018. DOI: 10.1257/aer.20171541

Additional Materials

JEL Classification

  • G51 Household Saving, Borrowing, Debt, and Wealth
  • K35 Personal Bankruptcy Law