We investigate a novel determinant of household financial delinquency, namely, people’s subjective expectations regarding the cost-benefit trade-off in default decisions. These expectations are determined by individuals’ self-efficacy, which is a non-cognitive ability that measures how strongly people believe that their effort will influence future outcomes. Using longitudinal household survey data, we show that people with higher self-efficacy, measured earlier in life, are less likely to be financially delinquent later on and to face consequences such as losing assets or access to traditional credit markets, are more likely to prepare for dealing with potential adverse shocks such as a job loss or a health event, and when faced with such shocks, are less likely to become financially delinquent. Complementing prior findings regarding the effects of cognitive abilities, financial literacy and education on economic behavior, our evidence suggests that non-cognitive abilities have an important role in household financial decision making.
Kuhnen, Camelia M. and Brian T. Melzer, Non-Cognitive Abilities and Loan Delinquency: The Role of Self-Efficacy in Avoiding Financial Distress, Journal of Finance, forthcoming.