A House Divided Over Debt

A spouse’s preferences can affect household spending and credit card bills.

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As Michaela Pagel, the Roderick H. Cushman Associate Professor of Business, demonstrates in her research, a house is not just a home; it’s a place where individual decisions about spending can have a profound effect on financial matters such as a family’s credit card debt.

“You can have $5,000 in credit card debt and that balloons into $25,000 if you roll it over for five years,’ Pagel says. “It is considered a problem in household finance research because it’s so expensive.”

Pagel’s latest research, “Family Finances: Intra-Household Bargaining, Spending and Capital Structure,” a working paper co-authored with Arna Olafsson of Copenhagen Business School, tests recent theories in the field of household finance tied to overspending and indebtedness.

“We wanted to see if some of the consumer debt we see at the household level is driven by individual household members having different preferences in how much debt there should be,” Pagel says. “For example, we see people with a lot of credit card debt as well as savings and we wonder, ‘Why don’t they take their savings and repay that debt?’”

Pagel and Olafsson gathered data from a financial aggregation app in Iceland, where joint accounts are prohibited, which allowed them to see how individual members of a household either spend or save. The app makes it possible to not rely on gender, for instance, as a proxy for preferences because, as the research notes, the difference in attitude between men and women regarding debt is unclear.

“[The research] called for two spouses and we did not want to classify them as male versus female because I personally don’t find that distinction very interesting,” Pagel says. “Gender is not a very good proxy for different preferences.”

Instead, the research divided household members into “debt-happy” and “no-debt happy,” or impatient spenders versus savers, to directly track their preferences.

“In turn we find that depending on whether the spender or saver receive extra money, it matters how much the overall household spends on certain goods and how much consumer debt it carries,” Pagel says.

Pagel examined the financial decisions a household would make if the “impatient spender” receives an increase in income from lottery winnings.

Pagel notes that if the “spender” has the same sort of preferences as the “saver,” then it would not matter who received the funds for the household’s decisions overall. Instead it seems that the household’s overall decisions are dependent on who receives the money as that spouse has more bargaining power.

“Only if there is a preference conflict would it matter who gets the money,” Pagel says. “That is the evidence for the idea that different preferences within the household and bargaining power matters.”

Pagel says that the closer study of intra-household preference conflicts could have ramifications for future policies, such as whether credit card debt should be restricted or interest rates should be capped and other possible regulations of the industry.

“You can only answer that question if you know where consumer debt is coming from,” Pagel says.

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