Does everyone accept a free lunch? Decision-making under (almost) zero-cost borrowing
Experiments in Financial Economics
ISBN: 978-1-78350-140-3, eISBN: 978-1-78350-141-0
Publication date: 2 December 2013
Abstract
Purpose
This chapter examines the debt aversion of a group of college students who have the opportunity to take out a sizable, low-interest, non-credit dependent loan. If the loan is simply invested in low-risk assets, it would effectively yield a free lunch in net interest earnings.
Methodology
The research uses survey data to examine demographic, socio-economic, personality traits, and other characteristics of those willing and unwilling to accept the loan offer, as well as their intentions of early repayment.
Findings
Individuals willing to accept the loan tend to have prior debt, longer planning horizons, come from middle-income families, and may have higher cognitive ability. Anticipated early repayment of the loan is more likely among those with prior investments, no prior debt, from STEM majors, with upper income parents, and those who expect to buy a home soon.
Research limitations/implications
We find no consistent relationships between debt aversion and intellectual ability or gender, but this finding may be hampered by our small sample of female loan-rejecters. Our limited sample size also precludes examining interactions between the dimensions of personality types.
Originality
We suggest consideration of policies to encourage “smart” borrowing, focusing on the financially disadvantaged, particularly for education loans. This study examines a uniquely occurring natural experiment regarding the opportunity to accept a non-credit dependent loan. Our results describe the behavior of young adults, an infrequently studied yet important segment of the population, especially in the context of borrowing behavior.
Keywords
Acknowledgements
Acknowledgements
The authors would like to thank Lou Cox for her expertise in programming the survey. We would also like to thank Kurtis Swope, participants at the 2012 Southern Economic Association Meetings in New Orleans, the co-editor, and an anonymous referee for helpful comments. IRB human subject’s approval received on September 12, 2012 under HRPP Approval #USNA.2012.0004-AM03-EP7-A.
Citation
Insler, M., Compton, J. and Schmitt, P. (2013), "Does everyone accept a free lunch? Decision-making under (almost) zero-cost borrowing", Experiments in Financial Economics (Research in Experimental Economics, Vol. 16), Emerald Group Publishing Limited, Leeds, pp. 145-170. https://doi.org/10.1108/S0193-2306(2013)0000016007
Publisher
:Emerald Group Publishing Limited
Copyright © 2013 Emerald Group Publishing Limited