Attitudes to Debt: The Role of Moral Values

Abstract

This paper tests how people's moral values influence their views of debt contracts.We ask participants to make decisions about debt contracts in different hypothetical situations (vignettes).We separately measure their moral values using the Moral Foundations Questionnaire (Graham et al., 2009).We have three main sets of findings.First, differences in moral values strongly explain the cross-section of participants' debt decisions.Participants with more conservative values show more support for credit score-based loan pricing, stricter forms of collateral, and tougher bankruptcy resolution.Second, when we randomly change the economic costs and benefits of debt within our vignettes, we find that participants change their answers in the direction predicted by economic theory.Third, participants' beliefs of the functioning of the credit market strongly correlate with their moral values.Participants with conservative values are more likely to believe that strict enforcement and risk-based loan pricing provide incentives and are economically efficient.More liberal participants believe that insurance against unlucky shocks are important.Consistent with moral values being distinct from Bayesian beliefs, financial literacy does not attenuate moral values in shaping beliefs about what is economically efficient.

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