Journal of Financial Economics 146 (3): 905–931
Shale Shocked: Cash Windfalls and Household Debt Repayment
Abstract. Using individual credit bureau data matched with cash windfalls from fracking, we estimate that windfall recipients reduce debt-to-income by 2.4 percentage points relative to no-windfall controls. Debt repayment effects are 3 times stronger for subprime individuals than for prime individuals. Based on the timing of upfront versus continuing cash payments, debt repayment coincides with the timing of payments but not with news about future payments. These findings present a challenge for purely forward-looking models of debt. Indeed, when we incorporate a windfall shock into a forward-looking model, the model predicts an increase in debt that runs counter to our evidence of debt repayment.
Keywords: cash windfalls, household debt, debt repayment, fracking, shale royalties, credit bureau data, subprime borrowers, permanent income hypothesis.
JEL codes: D14, D15, G51, N52.
In brief
When households receive a sudden cash windfall, many use it to pay down debt rather than borrow more.
Matching individual credit bureau records to royalty payments from shale oil and gas drilling (fracking), the paper finds that windfall recipients cut their debt-to-income ratio by 2.4 percentage points relative to similar people who received nothing, and the effect is three times larger for subprime borrowers than for prime borrowers. Repayment tracks when the cash actually arrives, not when people learn that future payments are coming. That pattern is hard to square with purely forward-looking models of borrowing, which predict that debt should rise after good news about future income.
| Panel A. Design | ||
|---|---|---|
| Question | Do households use cash windfalls to borrow more or to pay down debt? | |
| Setting | Royalty payments from shale oil and gas drilling (fracking) | |
| Data | Individual credit bureau records matched to windfall payments | |
| Method | Recipients compared with similar no-windfall controls; timing of upfront versus continuing payments | |
| Panel B. Reported effects | ||
| Debt-to-income of windfall recipients | −2.4 pp | |
| Repayment effect, subprime relative to prime | 3 times larger | |
| Repayment timed to | Cash receipt, not news | |
Summarized from the paper. See the paper for exact estimates and specifications.
Read and cite
- Published version, Journal of Financial Economics
- Working paper version, SSRN
- Earlier version, NBER Working Paper 27782
- DOI: 10.1016/j.jfineco.2022.09.008
Cookson, J. Anthony, Erik P. Gilje, and Rawley Z. Heimer. 2022. “Shale Shocked: Cash Windfalls and Household Debt Repayment.” Journal of Financial Economics 146 (3): 905–931. https://doi.org/10.1016/j.jfineco.2022.09.008.
@article{heimer2022shale,
author = {Cookson, J. Anthony and Gilje, Erik P. and Heimer, Rawley Z.},
title = {Shale Shocked: Cash Windfalls and Household Debt Repayment},
journal = {Journal of Financial Economics},
volume = {146},
number = {3},
pages = {905--931},
year = {2022},
doi = {10.1016/j.jfineco.2022.09.008},
url = {https://www.sciencedirect.com/science/article/pii/S0304405X22002069}
}
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