John A. Mondragon
Kellogg School of Management
2001 Sheridan Road
Evanston, IL 60208
NBER Working Papers and Publications
|January 2014||Does Greater Inequality Lead to More Household Borrowing? New Evidence from Household Data|
with Olivier Coibion, Yuriy Gorodnichenko, Marianna Kudlyak: w19850
One suggested hypothesis for the dramatic rise in household borrowing that preceded the financial crisis is that low-income households increased their demand for credit to finance higher consumption expenditures in order to "keep up" with higher-income households. Using household level data on debt accumulation during 2001-2012, we show that low-income households in high-inequality regions accumulated less debt relative to income than their counterparts in lower-inequality regions, which negates the hypothesis. We argue instead that these patterns are consistent with supply-side interpretations of debt accumulation patterns during the 2000s. We present a model in which banks use applicants' incomes, combined with local income inequality, to infer the underlying type of the applicant, so th...