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Presenter: Isabel H Macdonald
Title: The Psychological Cost of Debt: Evidence from Housing Mortgages in Pakistan (with Saad Azmat)
Abstract: Holding debt imposes both monetary and mental costs on the debtor. How do borrowers prioritize financial versus psychological costs, and what do these choices tell us about the mental burden of debt? In this project, we explore these trade-offs using repayment data for 3,705 borrowers with an Islamic housing mortgage in Pakistan. The product allows borrowers to make early payments that reduce anxiety but often increase the cost of borrowing. Forty percent of borrowers in our sample make early payments, leading to an average cost of PKR 354,155 ($4,132 USD) in additional fees and foregone savings. We develop a model of consumer hedonics to explain these results, and we rule out religion, demand for commitment devices, and misunderstanding of costs as complete explanations. These findings suggest that the mental burden of debt is high, and that there is a psychological benefit to decreasing debt, even if an account is not closed fully.
Contact: Tridevi Chakma email: tchakma@g.harvard.edu