When It Rains It Drains: Psychological Distress and Household Net Worth

Abstract

This paper establishes a sizeable negative effect of mental health on individuals' net worth. In a representative panel of U.S. households, we find that high psychological distress leads to a 35% increase in the baseline risk of entering into deficit net worth, where levels of debt outstrip the value of assets. Survival analyses further show that psychological distress accelerates the entry into and prolongs the stay in deficit net worth states, as well as increasing the probability of re-entry into deficit. We present evidence that psychologically distressed individuals entering deficit net worth experience a significant drop in income and liquid assets, while disproportionally increasing unsecured debt levels. The effects are not limited to those of low socioeconomic status (SES), although for individuals with high psychological distress in the low SES group, the effects are greater. Our findings highlight the significant longer-term implications of mental health on wealth accumulation.