Commitment to Debt Repayment: Evidence from a Natural Experiment

This paper documents extensive commitment to mandatory debt repayment. In a natural experiment in which households can apply for free mortgage-payment flexibility for one to twelve months, 43 percent of applicants choose a dominated option of short flexibility. I argue that short flexibility fulfills a desire for partial commitment due to self-control problems because (i) applying for short flexibility correlates with other commitment strategies to increase savings and (ii) consumption drops discontinuously at the predictable end of flexibility. This desire for commitment can reduce the potency of debt-forbearance offers in recessions and contribute to asset illiquidity.