Import Competition and Household Debt

We analyze the effect of import competition on household balance sheets from 2000 to 2007 using individual data on consumer finances. We exploit variation in exposure to foreign competition using industry-level shipping costs and initial differences in regions' industry specialization to study households use of credit markets in response to income shocks. We show that household debt increases significantly in regions where manufacturing industries are more exposed to import competition. A one standard deviation increase in exposure to import competition explains 30% of the cross-regional variation in household leverage growth, and is mostly driven by home equity extraction. Using data on individual expectations, we find that households in affected areas underestimate the persistence of income shock and lever up in order to smooth consumption. Our results highlight the role played by mortgage markets in absorbing displacement shocks triggered by globalization