Adverse selection in the credit market for consumers: does comparison income influence UK individuals’ demand for debt? -PhD thesis-

Publication type

Thesis/Degree/Other Honours


Publication date

June 1, 2013


This thesis employs economic experiments and empirical methods to
understand the role of comparison income in the demand of individuals'
debt. It then investigates the determinants of UK individuals' attitude
towards debt, focusing on the role played by comparison income. It uses
data from the British Household Panel Survey (BHPS) and the New Earnings
Survey (NES). The central contributions of this thesis include: (i) the
implementation of a life-cycle experiment testing for the differences
in consumption levels between Individual and Group treatments; (ii) the
computation of a proxy for comparison income using both the British
Household Panel Survey (BHPS) and the New Earnings Survey (NES); and
(iii) the extension of individual demand for debt models with comparison
income as main factor. This is achieved by designing and conducting
human-subject experiments, wherein individuals execute life-cycle tasks.
Results show evidence of larger consumption levels in the Group
treatment as compared to the Individual treatment; supporting the notion
of comparison consumption. In addition, the empirical methods consist
in a tobit and fixed effect models, where individuals' demand for debt
is function of several financial and demographic factors, including
comparison income. Results show that comparison income plays a
significant part in the individuals' demand for mortgage debt and
non-mortgage debt. Besides, findings suggest that debtors are more
likely to hold favourable attitude towards debt; and this is exacerbated
by household relative income. Overall, results support the hypothesis
of aspiration paradox (Olsen, 2008); which affirms individuals'
aspirations may lead them to incur debt beyond their financial means.





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