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Racial/Ethnic Disparities in Household Debt Repayment

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Racial/Ethnic Disparities in Household Debt Repayment Racial/Ethnic Disparities in Household Debt Repayment DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy in the Graduate School of The Ohio State University By Jonghee Lee, B.S., M.S. ***** The Ohio State University 2009 Dissertation Committee : Approved by Dr. Sherman D. Hanna, Advisor Dr. Jinkook Lee Dr. Lucia Dunn Advisor College of Education and Human Ecology Abstract This study proposes to gain insight into which key factors influence household debt repayment; whether these key factors differ across racial/ethnic groups; and whether these factors result in racial/ethnic variance. In particular, this study aims first to: (1) account for household characteristics related to repayment delinquency, (2) examine whether race and ethnicity are related to debt payment problems, even controlling financial events that might cause a decrease or disruption in the flow of periodic household income, financial buffers available in emergency and any other demographic variable and (3) examine how the effects of key factors differ across race and ethnicity. This study analyzes factors related to getting behind or missing payments on household debt by two months or more using the 1992 to 2007 Survey of Consumer Finances. This study defines payment delinquency according to two SCF questions asking (1) whether payments on any loans were sometimes late or missed, and (2) whether the respondent was ever behind in his or her payments by two or more months. Following this, this study will investigate reasons the propensity toward payment delinquency on household debt might differ by race and ethnicity. Finally, this study aims to address the sample selection bias that can affect predictors of delinquency risk in a given population of applicants. Therefore, this study tests for whether the coefficient of the selection effect is significantly different from zero. ii Finally, the results of this study have implications for financial education programs targeted at different racial/ethnic groups. A logit selection model is used, with the first stage being whether the household had any debt, and the second stage being whether payments on any of the debt were made late or missed by two months or more. This study tests the effect of consumers‘ financially adverse events, financial buffers and household debt burden on household debt repayment delinquencies. This study expects that Black and Hispanic households with debt would have the same delinquency rates as whites, conditional on any other demographic and economic characteristic. A probit analysis of having household debt shows that blacks, Hispanics, and Asians/others are less likely to have household debt than whites. There is a significant selection effect. The logit analysis of being delinquent shows that blacks are significantly more likely to be delinquent than Whites, but Hispanics are significantly less likely to be delinquent than Whites. Asians/others are not significantly different from otherwise similar whites. This study shows that there exist racial/ethnic differences in repayment delinquency behavior not only between white and minority households but between blacks and Hispanics. iii Dedicated to God and my family iv ACKNOWLEDGMENTS Firstly, I would like to thank my advisor, Dr. Sherman Hanna for his continuous help and tremendous encouragement during the process of my dissertation writing. During my PhD program, he was always supportive in my research and helps me develop my research methodology, with lots of comments. I wish to extend my sincere appreciation to my dissertation committee members, Dr. Lucia Dunn and Dr. Jinkook Lee for their encouragement during the process of my dissertation writing and for their advice, suggestions, and comments. Without those many meetings and inspiring talks with my dissertation committee, it would be hard for me to finish it on time. I would like to express special thanks and gratitude to the Department of Consumer Sciences for financial support during my Ph.D. study, especially Dr. Sharon Seiling. Dr. Sharon Seiling has given me invaluable research experience in her research projects. I really enjoyed three years working experience with her. I would like to thank Dr.Gong-soog Hong. She has been supportive and provided helpful comments to me. Special thanks are expressed to my parents and my best friend Seoungbum for their love, support and encouragement while I struggled to complete this dissertation. v VITA February, 1977……………………………….… Born, Seoul, South Korea 1999…………………………………………….. B.S., Education of Home Economics, Korea University, Seoul, South Korea 2001…………………………………………….. M.S., Home Economics, Korea University, Seoul, South Korea 2005 – Current……………………………….… Research and Teaching Assistant, Department of Consumer Sciences, The Ohio State University, Columbus, OHIO, USA. vi PUBLICATIONS Lee, J. & S. Yang.(2008). Debt Decision and Repayment of US Young Adults. International Journal of Human Ecology, 10(1), 1-16. Lee, J. (2008). Psychological Aspects of Household Debt Decision: The Use of the Heckman‘s procedure. International Journal of Human Ecology, 9(1), 81- 95. Lee, J. & S. D. Hanna. (2008). Racial/Ethnic Patterns in Credit Problems. Consumer Interests Annual. 54. 127. Lee, J. & S. D. Hanna. (2008). Delinquency Patterns by Racial/Ethnic Status: A Selection Model. Proceedings of the Academy of Financial Services. Lee, J. & S. Cho.(2008). The Effect of Credit on Spending Decisions: The Role of the Credit Limit and Self Control. Proceedings of the Academy of Financial Services. Lee, J. & S. D. Hanna. (2007). Changes in Credit Attitudes among U.S. Consumers: 1992-2004. International Journal of Human Ecology, 8(1), 79-94. Lee, J. & S. D. Hanna. (2007). Attitudes toward Using Credit for Loss of Income. Consumer Interests Annual, 53, 59-72. Loibl, C., J. Lee, J., Fox. & E. M. Gaeta. (2007). Women‘s High-Consequence Decision Making: Choice Processes for Mutual Fund Investments.‖ Financial Counseling and Planning, 18(2), 35-47. Lee, J. & S. D. Hanna. (2006). Factors Related to Consumer Credit Attitudes. Proceedings of the Academy of Financial Services. Lee, J. & Y. Lee. (2002). The Effect of Married Employees‘ Workweek on Leisure and their Usage. Journal of Korean Home Management Association, 20(4), 165-178. vii FIELDS OF STUDY Major Field: Consumer Sciences Area of Emphasis: Family Resource Management Minor Field: Statistics viii TABLE OF CONTENTS Page ABSTRACT……………………………………………………………………….…..ii DEDICATION………………………………………………………………..………iv ACKNOWLEDGMENTS……………………………………………………….……v VITA………………………………………………………………………………….vi LIST OF TABLES…………………………………………………………..………xiv LIST OF FIGURES……………………………………………………...………….xvi CHAPTERS: 1 INTRODUCTION ................................................................................................ 17 1.1 Background ...................................................................................................17 1.2 Problem Statement ........................................................................................21 1.2.1 Theoretical Issues ...........................................................................21 1.2.2 Racial/Ethnic Classification ...........................................................22 1.3 Goals and Objectives .....................................................................................24 1.4 Contributions .................................................................................................25 1.5 Organization Flows .......................................................................................26 2 THEORETICAL BACKGROUND ..................................................................... 27 2.1 The Economics of Household Debt Acquisition ...........................................27 2.1.1 Credit Demand ................................................................................27 ix 2.1.1.1 Life Cycle-Permanent income Hypothesis ............................27 2.1.1.2 Extension of Basic Model .....................................................31 2.1.2 Credit Supply ..................................................................................34 2.1.3 Interaction of Credit Demand and Credit Supply ...........................37 2.2 Repayment of Household Debt .....................................................................38 2.2.1 The Optimization Model of Consumer Choice ..............................38 2.2.2 Empirical Models ...........................................................................41 2.2.2.1 The Equity Theory ................................................................41 2.2.2.2 The Cash Flow Theory ..........................................................42 2.2.3 Measurement of Household Debt Repayment ................................44 2.2.3.1 Delinquency ..........................................................................44 2.2.3.2 Default ...................................................................................46 2.2.4 Summary .........................................................................................47 2.3 Conceptual Models and Research Hypotheses..............................................49 2.3.1 Conceptual Models .........................................................................49 2.3.2 Research Hypotheses ......................................................................49 2.3.2.1 Acquisition of Household Debt .............................................49 2.3.2.2 Repayment of Household Debt .............................................60
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