Disclosure as an Imperfect Means for Addressing Overindebtedness: An Empirical Assessment of Comparative Approaches

Abstract

Within a generation, household overindebtedness has grown to become a social problem of significant proportion in the US, the UK, and around the world. Public policy makers on both sides of the Atlantic have taken initial steps to ameliorate excessive and unwise use of consumer credit, by reforming the procedures for settling and collecting defaulted consumer debt (including the procedures available under consumer bankruptcy law) and by providing enhanced disclosure and other protections to borrowers. We focus on credit card disclosure reforms in this paper and note that empirical research (ours and others) suggest that enhanced disclosure requirements are, at best, an incomplete mechanism for tackling the problem of overindebtedness. Enhanced disclosure presumes a rational actor model of consumer decisionmaking. In earlier articles, both together and with other co-authors, we have argued that extant data do not support fundamental assumptions underlying a strong version of the rational actor model of consumer credit but do support models that view consumer borrowers as quasi-rational, emotional actors. Research supporting a behavioral, emotional model of consumer decisionmaking undercuts enhanced disclosure as a remedy for increased consumer debt loads. This article proceeds in four parts: Part I compares household indebtedness - and measures of overindebtedness - in the US and UK. Part II looks at recent legislative responses to this problem, and concludes that the US approach is premised on a rational actor model of consumer decisionmaking, while the UK presumes a consumer in need of regulatory protection, enhanced information and debt advice. In Part III, we describe our most recent experimental work and its results, and reach similar conclusions about the likelihood that enhanced disclosure will quell the problem of overindebtedness. Part IV draws tentative conclusions for future research intended to study overindebtedness.