Using bounds to investigate household debt repayment behaviour

• We investigate households debt repayment behaviour using a unique source of micro-data.
• The data records households default and arrears, but also provides information on those households who are not given credit.
• The data allows us to avoid implausible identification assumptions and provide partial identification for the effect of various factors on household repayment behaviour.
• Among those factors, the results highlight a role for the availability of alternative credit sources in shaping repayment behaviour.
• Other things equal, households who can rely on the financial help of relatives and friends, are predictably worse borrowers.

Understanding the factors that influence arrears is crucial if policy makers wish to alleviate the problems caused by debt. But conventional estimates of repayment behaviour impose implausible assumptions about lender behaviour. However, an upper and lower bound for the effect of the determinants of repayment behaviour can be estimated. Reasonable assumptions about the behaviour of economics agents narrow these bands. We use administrative data from a leading Italian lender to the household sector to demonstrate the methodology, and we show that conventional estimates under-estimate the true default probability.