Sahil Raina, University of Alberta

"Labor Market Consequences of Increased Default Penalties"

We examine how borrowers reduce their default rates when faced with heightened default penalties, specifically with respect to their labor market choices. Exploiting a 2009 Canadian regulation increasing the expected cost of default, we confirm that affected borrowers indeed become less likely to default. To reduce their default rates, they increase the number of jobs they hold and spend less time searching for jobs when unemployed. Consequently, they have lower incomes and face larger income declines in their new jobs. They also choose jobs with lower retirement savings. Further, we show that these borrowers’ labor incomes do not recover after they pay off their debt.

Contact person: Peter Norman Sørensen