Who Feels Constrained by High Debt Burdens? Subjective vs. Objective Measures of Household Indebtedness

This paper analyzes differences in self-assessed debt burdens of German households confronted with an objective debt burden. Using data from the German Socio-Economic Panel, my econometric analysis shows that a household's subjective debt burden is not only influenced by the current constellation of income, debt service and, possibly, the potential subsistence level, but also by expectations of the personal and overall socio-economic environment in the future (especially unemployment), as well as by further undetermined (and possibly non-financial) factors. Confronted with a certain ratio of consumer debt repayments and income, women perceive significantly higher subjective debt burdens. Unemployment is associated with drastically higher self-assessed debt burdens even when controlling for the overall financial situation of the household. Furthermore, some discrepancies between East and West Germans are detectable. Only some differences in the subjective perception of objective debt burdens can be explained with personal traits (such as risk attitudes) and life satisfaction. I draw the following conclusions: First, self-assessed debt burdens contain information beyond the current economic situation, e.g., expectations on future incomes. Second, relying on subjective debt statements may lead to biased results for policy analysis if the researcher does not account for non-financial factors.