Proceedings of the National Academy of Sciences · 2019 · 144 citations · 34 references
Chronic debt has a psychological impact on the poor, as debt is viewed as costly mental accounts that consume cognitive bandwidth, not merely a financial burden. The study hypothesizes that chronic debt impairs psychological functioning and decision‑making, reinforcing the poverty trap. The authors employed a quasi‑experimental design, evaluating the effects of a one‑off, unanticipated debt‑relief program equivalent to several months’ household income. Debt relief led to significant improvements in cognitive functioning, reduced anxiety, and less present‑bias among those who paid off more debt accounts, offering actionable evidence for poverty‑alleviation policy.
Significance The impact of chronic debt on the poor is psychological, not just financial. We hypothesize that chronic debt impairs psychological functioning and decision-making, contributing to the poverty trap. This is because debt is not considered fungible and is viewed as costly mental accounts that consume cognitive bandwidth. We test this using quasiexperimental evidence from a one-off, unanticipated debt-relief program worth several months’ household income. Comparing the poor before and after debt relief, those with more debt accounts paid off experienced greater improvements in cognitive functioning, reported less anxiety, and became less present-biased. These findings provide actionable evidence for poverty-alleviation policy.
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