Research seminar: Peer Effects and Debt Accumulation: Evidence from Norwegian Household
- Magnus Gulbrandsen, BI/SSB
- 27 February 2020
- 11:45 - 12:45
- Auditoriet, SSB, Akersveien 26
Magnus Gulbrandsen, BI/SSB: https://www.bi.edu/About-bi/employees/department-of-economics/magnus-a.-h.-gulbrandsen/
The increase in both household debt and inequality over the past decades, begs the question of whether the two are causally linked. Specifically, it has been suggested that increasing income inequality can cause higher debt in households in the lower part of the income distribution. In this paper I analyze whether transitory shocks to households' income can affect the debt growth among those households' neighbors. I do so with de-identified administrative data on all Norwegian households and their balance sheets over the period 1993-2011, and use sizable lottery prizes above NOK 100 000 ($12 000) as income shocks that affect only one household in a neighborhood. I then analyze how neighbors' debt growth respond to the winners' lottery prize. Under the assumption that lottery prizes are truly random and therefore unpredicted, this empirical strategy identifies causal peer effects in debt, i.e. how one the winner's increased income affect the neighbors debt accumulation. The results show a positive and significant debt effect. One year after a lottery prize is received, the neighbors have, on average, increased debt between 3.5 and 9 percent of the prize, depending on distance to the winner. The effect is partially non- linear. For big prizes (above NOK 1 million ($120 000)) the effect is zero. Consistent with the notion that peer effects dampen with social interaction, the estimated effects are strongest for the closest neighbors, and fall as distance to the winner increase. Dividing the sample of neighbors by winner-neighbor characteristics reveals that the peer effects are strongest among neighbors that have been neighbor with the winner for an extended period of time, and that have similar family structure (family with children or childless) as the winner. There are no robust effects on labor earnings or liquid assets and winners' are estimated to spend about 45 % of the prize the year they win. Taken together, this suggests that neighbors take up debt to keep up with their winning neighbor's spending hike.