Behavioral Economics of Debt Aversion and its Economic Consequences in China

Many households and firms are reluctant to take on debt, even when borrowing would be financially beneficial. This reluctance—known as debt aversion—can limit spending, investment, and overall economic growth. Traditional fiscal and monetary policies assume that people and businesses respond rationally to cheaper or more available credit. Yet if behavioral biases like debt aversion prevent them from borrowing, these policies may not deliver their intended effects. So far, much of what we know about debt aversion comes from laboratory experiments and surveys. These have shown that debt aversion is common across different groups and contexts. However, they cannot fully capture how people behave when real money, institutions, and policy incentives are at stake. We still lack clear evidence on how debt aversion influences actual borrowing and repayment choices, and how these choices in turn shape consumption, investment, and the effectiveness of economic policy. This project addresses that gap by using large-scale, transaction-level data on household and corporate borrowing and banking activities. These records include loan terms, repayment histories, account balances, and spending patterns, allowing us to track how debt aversion manifests in practice. We will ask three core questions:1. How does debt aversion manifest in real borrowing and repayment behavior?2. What drives differences in debt aversion across households and firms, such as past debt experiences or the way loans are structured?3. How does debt aversion affect the success of policies designed to boost borrowing, spending, and investment?To answer these, we will study China’s interest-subsidized loan policy as a natural experiment. By comparing financial behavior before and after the policy across groups with different levels of debt aversion, we can isolate how much reluctance to borrow reduces the impact of credit-based policies. The results will provide the first empirical evidence on how debt aversion in real markets translates into broader economic outcomes. For researchers, this will open new ground at the intersection of behavioral economics, household finance, and macroeconomic policy. For policymakers, the findings will offer practical insights into how to design interventions that address not just the cost of credit, but also the psychological barriers that limit its use. Ultimately, the project will help explain why some policies underperform and identify ways to make fiscal and monetary tools more effective in stimulating household consumption, firm investment, and long-run growth.