Household Debt in Mexico: A Study on the Determinants of the Financial Burden and Default Risk

Abstract

This research analyses the financial management of household debt in México, identifying the determinants and potential simultaneity of the financial burden and non-payment of acquired credit. The National Household Financial Survey (ENFIH, 2019) is used to estimate a maximum likelihood mixed strategy combining a Heckit-Heckprobit model for the financial burden and the probability of default, respectively. This approach corrects for selection bias to consistently estimate the socioeconomic determinants of financial burden and default risk. The estimates suggest that income, wealth, household debt, debt concentration index, and debt quality are the relevant variables in explaining financial burden and debt default. Similarly, the results show that both processes are determined simultaneously and are complementary. The study’s main contribution is to provide consistent estimates of the probability of default and financial burden, determining the correlation between the unobservable variables of both models. These findings can inform regulatory policy to reduce systemic household risk and improve consumer protection. Our results identify the sources of systemic and shared risk of debt instruments for financial intermediaries, such as credit cards and departmental credit.