The role of risk attitudes and expectations in household borrowing: evidence from Estonia

Abstract

ABSTRACT This study investigates the role of risk attitudes and financial expectations in households’ borrowing behaviour. The central research question is whether risk aversion and optimistic expectations provide additional information beyond the main economic and sociodemographic characteristics in predicting applications for credit and the size of debt. The paper uses microdata from the Estonian Household Finance and Consumption Survey (HFCS) and estimates probit and Heckman models. My analysis shows that risk-tolerant households apply for loans more often than risk-averse households do and that their loans are larger. The variables describing the household's expectations for its future financial situation are on their own related to the decision to apply for a loan, but they do not contain any relevant additional information beyond the main economic and sociodemographic characteristics of the household.