Lending to Sensation-Seeking Households

Abstract

Using the propensity to engage in extra-marital activities as a proxy for sensation seeking behavior, we show that sensation-seeking households exhibit riskier economic behavior. They are more likely to obtain a home loan and, conditional upon borrowing, they choose larger loans. Banks are at least partially aware of the financial implications of sensation-seeking behavior. They supply larger credit due to higher demand, but at higher rates due to greater perceived risks. The resulting separating equilibrium has higher loan defaults as the perceived risk is realized.