Using individual-level panel data, this paper examines the relationship between problem debt and psychological health. Individuals exhibiting problem debt, by either subjective or objective measures, also exhibit much worse psychological health, by either subjective or objective measures. However, selection into problem debt on the basis of poor psychological health accounts for much of this difference. The causality between problem debt and psychological health may be two-way. Local house price movements exogenous to individual households are used to establish the causality from problem mortgage debt to psychological health. In addition, the social stigmas effects of problem debt are investigated using local bankruptcy and repossession rates as indicators of the local prevalence of problem debt in a reference group population. Results indicate there is a sizeable causal link between problem debt and psychological health and that reference group effects are also significant in magnitude.
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Published in Economic Journal 2012:122:1094-1114
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