Risk Aversion and the Size of Desired Debt

We investigate the determinants of the level of desired total, secured, and unsecured debt for a panel of Italian households over the period 1989-2016, accounting for both left censoring and sample selection. In particular, we focus on the role of households' attitudes towards risks, using both their observed behaviour in the financial market and the responses to a hypothetical lottery choice question. We find risk aversion to be a significant determinant of the desired amount of unsecured, secured, and total debt. Relatively more risk adverse households desire more debt, suggesting that Italian households may rely on debt to insure themselves against shocks.