Understanding Views on Debt

Pablo Rodriguez, Sloan Finance PhD, gives us a look into his current research on morality and debt with Antoinette Schoar and David Thesmar

We know that debt plays a key role in modern economies. Most economists view it as an efficient tool to enforce contracts between market participants. But debt also has a strong moral dimension. 

For example, it is common to think of debt repayment as a duty, and failing to do so is not only a matter of economics but also of honor. Understanding this interaction between the economic role and moral conception of debt is important because it can significantly affect how households choose to participate in credit markets, how they abide by the rules of the contracts they enter into, and how they believe the market itself should be regulated. One way to investigate these questions is to run surveys and try to understand directly how people think about this set of issues. This is exactly what I have been working on with Antoinette and David since last year. Most of my work is devoted to crafting experiments that allow us to understand people’s views on debt, both in terms of moral values and economic efficiency. More precisely, we construct hypothetical situations where survey respondents must make choices that require them to balance their economic concerns with their moral values. Ultimately, this will give us clear measures of the extent to which specific debt contracts and market mechanisms depend on the moral values held by respondents.

Key takeaways

1. Moral values are an important driver of debt attitudes. This might seem obvious at first, but it is actually a key result. In finance, there is often a belief that moral considerations are suspended during market interactions and only resume once you exit the market. This research shows that this is far from the case: moral values can tell us a great deal about which types of debt contracts people think should be used.
2. Respondents' views on debt tend to align with their moral values. This suggests that attitudes toward debt do not depend primarily on financial literacy or general education. Instead, there are two possible explanations. It could be that moral values function like preferences, and people choose their economic beliefs to align with those preferences. Alternatively, moral values may be deep beliefs about how the world works, and these beliefs are applied to credit markets just as readily as to other domains. This is particularly exciting because it reveals that there is still much to understand about the underlying mechanisms at play.

What interested you about the research question?

I have always been attracted to topics and projects that explore how dimensions of human reasoning and behavior that initially seem detached from markets are actually key to understanding their functioning. Additionally, much of my past work focused on observational data. Working on this paper was an opportunity to learn how to run surveys, design experiments, and ultimately create our own data. That has been very exciting.

Impact

This research opens a rich research agenda on understanding the extent to which moral values play an active role in shaping decisions in financial markets. This means running more surveys, but also informing the models we write and the way we think about how individuals make decisions. Debt is a particularly important area to explore this question because it is so ubiquitous in any economy, whether today or in the past. More broadly, I believe this research is valuable for thinking about policy. For example, if we know which bankruptcy policies are perceived as fair or unfair, we can better design the incentives market actors face to achieve more efficient outcomes.

What makes this an important question?

As a PhD student, this work is important to me on multiple levels. First, it is a privilege to observe how experienced researchers think about and approach complex questions. Watching a project evolve—understanding what matters most, how to prioritize, and how to think critically about research—is key to being able to do it on my own.

Second, as important as it is to observe, I think an even more important step is the opportunity to generate ideas, discuss them, and refine them. Being in that role of producer, so to speak, is also a key part of the process.

Finally, I think great research should be able to advance our understanding of human behavior. If by doing so, we can also improve outcomes for households or help policymakers design more effective regulations, that would be deeply meaningful.