immediate aftermath of the Covid-19 crisis. We elicit first and second order beliefs about how debt relief affects future repayment, borrowing, and expectations of future relief. We compare responses for debt forgiveness and forbearance, as well as for beneficiaries and non-beneficiaries of debt relief.

Overall, a majority of respondents report that debt relief would make them more likely to repay, apply for, and be approved for future loans. This suggests anticipation of improved repayment capacity, and is contrary to widespread concerns about moral hazard in response to debt relief (see, for example, Giné and Kanz 2018 and Fiorin, Hall and Kanz 2023). Interestingly, respondents are more likely to report anticipating applying and receiving credit when offered debt forbearance instead of debt forgiveness. This is consistent with borrowers associating less stigma with forbearance compared to forgiveness, perhaps because forbearance is seen as a chance to prove their creditworthiness. Nonbeneficiaries report that debt relief policies make future debt relief more likely while beneficiaries report that such policies make future relief less likely.

Our exploration of debt relief in developing countries begins with the observation that there are several important differences in the economic environment that shape how households in advanced and developing economies accumulate and resolve debt. Households in developing economies differ in terms of the economic activities they are engaged in, the nature, frequency and seasonality of economic shocks they face, as well as the financial contracts that are available to them to mitigate risks and smooth consumption. Similar to low-income households in advanced economies, households in developing economies frequently engage in repeated formal and informal borrowing at high interest rates and are therefore especially vulnerable to persistent debt traps (Banerjee and Duflo, 2007; Karlan et al., 2019; Badarinza et al., 2019).<sup>2</sup> Because many households in developing economies are producers as well as consumers, barriers to the reduction of unsustainable debts affect not only consumption but also have consequences for investment incentives and productivity (see Myers, 1977; Krugman, 1988).

There are also important differences in the institutions for debt resolution available to households in advanced and emerging economies. Many advanced economies offer some form of personal bankruptcy as a rules-based form of debt relief for households in financial distress. In the US, for example, households obtain more than $450 billion in debt relief through the personal bankruptcy system each year, with nearly one in ten households having filed for bankruptcy at some point (Keys, 2018; Dobbie and Song, 2015). Where personal bankruptcy is available, it functions as an important social safety net. When households lack insurance against adverse events such as job loss and illness, the option to discharge debt in bankruptcy acts as a de facto source of insurance. Estimates from the US find that the insurance value of bankruptcy is large, equaling 58.4% of annual consumption for the marginal bankruptcy filer (Indarte, 2023). In contrast, most developing economies lack an effective personal bankruptcy system. More than half of all emerging economies have no laws that provide for the discharge of an insolvent individual’s debt and even where personal bankruptcy laws exist, overburdened courts often make it difficult for households and small businesses to obtain debt relief.

Newly available data on household balance sheets shows that despite these differences, there are nonetheless some striking similarities in the finances of households in advanced and emerging economies. Households in advanced and emerging economies are, for example, remarkably similar in

> 2 See, for example, Bertrand and Morse (2011) and Skiba and Tobacman (2019) on debt traps and payday lending in the US.

3