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Abstract Income share agreements (ISAs), which cover college attendance costs in exchange for claims on future income, may attract students with poor earnings potential (adverse selection) or distort labor supply among enrollees (moral hazard). In this study, we conduct a field experiment to separately test for moral hazard and adverse selection by varying the contract terms offered by a large ISA provider in South America. Specifically, we randomly offer existing ISA enrollees the opportunity to lower their pledged income shares by 5 or 10 percentage points in exchange for flat monthly fees ranging from 1,000 to 70,000 pesos. To identify moral hazard, we estimate the treatment effect of accepting a contract with a lower income-share obligation, using contract offers as instruments. To identify adverse selection, we compare individuals who received different menus of offers but ultimately pledged the same income share. Estimating treatment effects and selection patterns in earnings, repayment, and risk factors enables us to quantify the welfare losses associated with information asymmetries in equity-like contracts and helps inform the debate over how to fairly and efficiently finance human capital investments. We conduct a field experiment in Latin America that randomly offers individuals different monthly payment obligations (debt) in exchange for pledging varying shares of their future incomes (equity). Our experimental design identifies selection and treatment effects across both debt and equity dimensions of the experimental offers. Specifically, we randomly offer enrollees in income-share agreements (ISAs) the opportunity to lower their pledged income shares by 5 or 10 percentage points in exchange for flat monthly fees ranging from 25,000 to 400,000 pesos. To identify moral hazard, we estimate the treatment effect of accepting a contract with a lower income-share obligation, using contract offers as instruments. To identify adverse selection, we compare individuals who received different menus of offers but ultimately pledged the same income share. Estimating treatment effects and selection patterns in earnings, repayment, and risk factors enables us to quantify the welfare losses associated with information asymmetries in equity-like contracts and identify market failures in household financing.
Trial End Date June 15, 2022 June 15, 2023
Last Published December 02, 2021 12:27 PM May 12, 2022 01:53 PM
Intervention (Public) We randomly offer existing ISA enrollees the opportunity to lower their pledged income shares by 5 or 10 percentage points in exchange for flat monthly fees ranging from 1,000 to 7000 pesos. To identify moral hazard, we estimate the treatment effect of accepting a contract with a lower income-share obligation, using contract offers as instruments. To identify adverse selection, we compare individuals who received different menus of offers but ultimately pledged the same income share. We randomly offer existing ISA enrollees the opportunity to lower their pledged income shares by 5 or 10 percentage points in exchange for flat monthly fees ranging from 1,000 to 400,000 pesos. To identify moral hazard, we estimate the treatment effect of accepting a contract with a lower income-share obligation, using contract offers as instruments. To identify adverse selection, we compare individuals who received different menus of offers but ultimately pledged the same income share.
Experimental Design (Public) Our experiment involves randomly extending revised contract offerings to graduates enrolled in Lumni ISAs. These contract offerings will take the form of “discounts” to income-share obligations in exchange for an additional up-front payment. For example, consider an ISA enrollee three years after graduation who is obligated to pay 15 percent of her annual income to Lumni over the next two years. One experimental treatment would offer that student a revised contract reducing her income-share obligation to 10 percent in exchange for an additional 70,000 pesos per month. Another treatment offers the same five-percentage-point reduction for 1,000 pesos, and another treatment group offers a ten-percentage-point reduction for 70,000 pesos. Our experiment involves randomly extending revised contract offerings to graduates enrolled in Lumni ISAs. These contract offerings will take the form of “discounts” to income-share obligations in exchange for an additional up-front payment. Consider an ISA enrollee three years after graduation who is obligated to pay 15 percent of her annual income to Lumni over the next two years. In the first wave of the experiment, one experimental treatment would offer that student a revised contract reducing her income-share obligation to 10 percent in exchange for an additional 70,000 pesos per month. Another treatment offers the same five-percentage-point reduction for 1,000 pesos, and another treatment group offers a ten-percentage-point reduction for 70,000 pesos. In the second wave of the experiment, we extend another offer to the same sample of ISA enrollees eighteen months after the initial treatment. Within each of the four initial experimental groups, we randomly offer income-share reductions of 5pp to one half and 10pp to the other half. We then determine flat monthly payments by randomizing the "valuation" placed on each individual's income in pesos-per-income-share. For example, a valuation of 1 million pesos would require a flat payment of 100,000 pesos for a 10pp income-share reduction or 50,000 pesos for a 5pp income-share reduction.
Sample size (or number of clusters) by treatment arms Control: No revised contract offered, N = 46 Treatment 1: ISA reduction=10%, Flat Monthly Payment=70,000 pesos, N = 40 Treatment 2: ISA reduction=5%, Flat Monthly Payment=70,000 pesos, N = 30 Treatment 3: ISA reduction=5%, Flat Monthly Payment=1,000 pesos, N = 10 Wave 1: Control: No revised contract offered, N = 46 Treatment 1: ISA reduction=10%, Flat Monthly Payment=70,000 pesos, N = 40 Treatment 2: ISA reduction=5%, Flat Monthly Payment=70,000 pesos, N = 30 Treatment 3: ISA reduction=5%, Flat Monthly Payment=1,000 pesos, N = 10 Wave 2: Treatment 1: ISA reduction=5%, Flat Monthly Payment=25,000 pesos, N = 19 Treatment 2: ISA reduction=5%, Flat Monthly Payment=50,000 pesos, N = 10 Treatment 3: ISA reduction=5%, Flat Monthly Payment=100,000 pesos, N = 13 Treatment 4: ISA reduction=5%, Flat Monthly Payment=200,000 pesos, N = 20 Treatment 5: ISA reduction=10%, Flat Monthly Payment=50,000 pesos, N = 19 Treatment 6: ISA reduction=10%, Flat Monthly Payment=100,000 pesos, N = 15 Treatment 7: ISA reduction=10%, Flat Monthly Payment=200,000 pesos, N = 11 Treatment 8: ISA reduction=10%, Flat Monthly Payment=400,000 pesos, N = 18
Additional Keyword(s) Student Loans, Student Debt, Income Share Agreement, Adverse Selection, Moral Hazard, Income Insurance Household Finance, Income Share Agreement, Equity, Adverse Selection, Moral Hazard, Income Insurance, Student Loans, Student Debt
Keyword(s) Education, Finance Education, Finance, Labor
Intervention (Hidden) The start date for Wave 1 implementation is 2020-12-09 The start date for Wave 2 implementation is 2022-05-16
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