Scholion.ai

Household debt overhang and human capital investment

Gustavo Manso, Alejandro Rivera, Hui (Grace) Wang, Han Xia

Journal of Financial Economics · 2025 · Volume 172

DOI: 10.1016/j.jfineco.2025.104141

Abstract

Unlike labor income, human capital is inseparable from individuals and does not completely accrue to creditors. Therefore, human capital investment is more resilient to “debt overhang” than labor supply. We develop a dynamic model displaying this difference. We find that while both labor supply and human capital investment are hump-shaped in household indebtedness, human capital investment declines less aggressively as indebtedness builds up. Importantly, because human capital is only valuable when households expect to supply labor, the greater reduction in labor supply due to debt overhang back-propagates into ex-ante human capital investment. We provide empirical support for the model.

Enable JavaScript for citation tools and additional paper interactions.