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Proc Natl Acad Sci U S A. 2019 Apr 9;116(15):7244-7249. doi: 10.1073/pnas.1810901116. Epub 2019 Mar 25.

Reducing debt improves psychological functioning and changes decision-making in the poor.

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Social Service Research Centre, National University of Singapore, Singapore 119246;
School of Business, Singapore University of Social Sciences, Singapore 599494.
Social Service Research Centre, National University of Singapore, Singapore 119246.
Department of Social Work, National University of Singapore, Singapore 117570.


We examine how chronic debt affects behavior by studying how a large, unanticipated debt-relief program affected psychological functioning and economic decision-making in beneficiaries. A charity granted low-income households debt relief worth up to Singapore dollars 5,000 (∼3 month's household income). We exploited quasiexperimental variation in the structure of debt relief: For the same dollar amount of relief, some beneficiaries had more debt accounts eliminated, while others had fewer paid off. Comparing 196 beneficiaries before and after debt relief, and controlling for debt-relief amount, having an additional debt account paid off improves cognitive functioning by about one-quarter of a SD and reduces the likelihood of exhibiting anxiety by 11% and of present bias by 10%. To achieve the same effect on cognitive functioning of eliminating one debt account, a beneficiary must receive debt relief worth ∼1 month's household income. There is no effect of debt-relief magnitude on anxiety and decision-making. We exclude training and calendar effects, debt-causing behaviors, and liquidity constraints as explanations. Instead, these results support the hypothesis that chronic debt impairs behavior because the mental-accounting costs of owing distinct debt accounts consume mental bandwidth. Poverty-alleviation policies aimed at the indebted poor should consider addressing mental accounting and bandwidth taxes.


cognitive functioning; debt; mental accounting; poverty; present bias

Conflict of interest statement

The authors declare no conflict of interest.

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