| Abstract |
Using health shocks to identify financial distress situations, I document that peer distress leads to a decline in individual leverage and debt on average. This decline occurs as individuals borrow less on the intensive margin, pay higher fractions of their debt and save more following peer distress. The estimates suggest that these peer effects can explain a decline of up to $213.31 billion in household debt between 2011 and 2015, corresponding to 1.82% of total household debt in 2011. The heterogeneity in responses highlight the role of changes in beliefs and preferences as the underlying mechanism. |