Household Debt Repayment in Equilibrium

Abstract

This dissertation consists of three essays in household finance that study household debt repayment decisions. A unifying theme is understanding how institutional and behavioral frictions shape borrower behavior and aggregate to affect market equilibrium. The first essay studies the house price effects of mortgage rate lock: a financial incentive for owners with fixed-rate mortgages to remain in their homes rather than sell when market mortgage rates rise above their existing rate. Rate lock raises house prices by reducing the supply of available homes from owners who would otherwise exit to the rental housing market. This attenuates the negative house price effects of reduced demand caused by higher rates. The second essay compares the impacts of debt relief versus cash transfers by analyzing the 2020 CARES Act's student loan forbearance and stimulus check programs. Borrowers use forbearance liquidity to non-optimally prepay 0%-interest student loans instead of repaying higher-interest debt, and they consume a much lower share of their forbearance liquidity than of stimulus payments. This liquidity flypaper effect makes forbearance a less effective and more costly countercyclical fiscal tool. The third essay provides further evidence of this effect in the growing market for buy-now, pay-later (BNPL) point-of-sale installment credit. BNPL increases total spending and expenditure smoothing and shifts spending towards retail purchases. These results are more quantitatively consistent with a flypaper effect, where retail liquidity from BNPL is used to finance excess retail consumption, than standard calibrations of incomplete-markets consumption-saving models.