Journal Issue

What Drives Household Borrowing and Credit Constraints? Evidence from Bosnia and Herzegovina

Ke Chen Chen , and Mali Chivakul
Published Date:
August 2008
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I. Introduction

Many Central and Eastern European (CEE) as well as South Eastern European (SEE) countries have experienced rapid credit growth in recent years. Rapid credit growth, especially for household credit, has been supported by favorable macroeconomic conditions. Lower interest rates, low inflation and robust economic growth have made borrowing more attractive and affordable. With many banks—especially foreign-owned ones—entering the market and competing for new customers, the supply of funds for household loans has increased. Credit constraints appear to have eased as households are able to borrow for their consumption and housing needs.

The features of Bosnia & Herzegovina (BiH)’s credit boom reflect the general trends in the region. Although the boom started later than its peers due to its late start to transition and the war in the 1990s, BiH has caught up quickly with the regional trends. Real credit growth averaged 22.8 percent between 2001 and 2006, and the credit-to-GDP ratio more than doubled during the same period. As in other CEE and SEE countries, the rapid credit growth has been led by lending to households. In BiH, the average real growth of credit to households between 2001 and 2006 was about 50 percent, while the real growth rate for credit to enterprises was only 13.5 percent.

This paper examines the determinants of Bosnian households’ participation in the debt market and their credit constraints. To date, empirical studies on the determinants of household debt and credit constraints have mainly been limited to a few advanced countries. To our knowledge, there has been no study on this topic in Eastern European or transition countries. This paper utilizes a unique panel data set, “Living in BiH”, which provides individual-level and household-level socioeconomic data, as well as self-reported information on household debt and individuals’ participation in the debt market during 2001–04. The paper identifies and models the determinants of the likelihood of credit market participation and being credit constrained, and the size of debt desired by Bosnian individuals.

For consumers in any country, the decision to enter the debt market depends on both demand and supply factors. On the demand side, consumers’ desire to borrow will determine their probability of participating in the credit market. On the supply side, lenders will decide whether and how much to lend, considering the capacity of their potential borrowers to repay. Actual debt observed is the result of both demand and supply factors. It will be lower than desired if consumers are not able to obtain the credit they want, due either to quantity rationing or the high price of credits. Consumers who are not able to obtain as much credit as they want are credit constrained.

Understanding credit constraints and their determinants has important policy implications at both the micro and macro levels. At the micro level, the determinants of credit constraint help shed light on the credit granting process of the lenders. At the macro level, credit constraints have been cited to explain the observed correlation between current consumption and income growth, and the rejection of the permanent income hypothesis. In other words, constrained consumers are not able to smooth their consumption effectively, leading to excess sensitivity of consumption to current income fluctuation. The presence of consumers with credit constraints also has implications for the design of fiscal policy. A fiscal stimulus package that targets population groups that are more likely to face binding borrowing constraints is likely to be most effective.

Our results, compared with existing studies from advanced countries, highlight the impact of the post-conflict and transitional nature of the country on the behavior of borrowers and lenders. As expected, age, income, wealth and education qualifications are the main factors driving credit market participation, while high income and high wealth lower credit constraints. In BiH, the probability of credit market participation peaks at 45 years old, considerably higher than in the advanced countries. At the same time, older individuals are significantly more constrained than their peers in the advanced countries. The results imply that the current credit boom largely reflect the overall post-war demand, and indicates the worse-off position of the older generation in transition economy. Moreover, our results also underscore the structural nature of unemployment as well as the mismatch between education qualifications and earning prospects in BiH. Education variables have no significant effect on the likelihood of being constrained, while, unlike in the advanced countries, being unemployed significantly increases the likelihood.

The rest of the paper is organized as follows. Section II provides a theoretical framework and discusses the related literature. Section III describes the methodology. Section IV presents the data. Section V discusses the empirical results, and Section VI concludes.

II. Theoretical Framework and Related Literature

The starting point of the theory of household debt and credit constraints is the life-cycle model and the permanent income hypothesis of Modigliani (1986) and Friedman (1957). A representative household maximizes the utility function subject to an intertemporal budget constraint:

where c is consumption, y is labor income, A is household net assets, r is the rate of return on the assets, and θ is the discount rate. The first-order condition of this problem is the standard Euler equation:

The Euler equation implies that households will try to maximize their utility by smoothing marginal utility over the life cycle. In a period of low income, households will borrow to finance current consumption; households will repay in a period of high income. In a world with perfect capital markets, households will be able to borrow the amount of money they desire to smooth their consumption. According to this basic model, current consumption should be independent of current income.

However, empirical studies show that consumption tracks income over the life cycle—an outcome that calls into question the simple versions of the theory (see, for example, Hall and Mishkin (1982) and Zeldes (1989)). One of the main explanations for this is that at least some consumers face binding credit constraints. Although these consumers would like to borrow (or borrow more) to smooth their consumption, they are not able to borrow at all or as much as they would like, or that the rate at which they borrow is prohibitively expensive. Earlier empirical papers do not directly observe credit constraints. Instead, they evaluate the gap between desired and actual consumption of households using cross-sectional data by simply assuming that individuals with certain characteristics are more likely to be credit constrained (see Hayashi (1985) and Jappelli and Pagano (1988), for example).

To better understand the nature of credit constraints, a number of empirical studies focus on the characteristics of consumers who are more likely to be credit constrained. Most rely on self-reported survey data to identify consumers with credit constraints. These studies estimate the probability of being credit constrained and the demand for household credits. Early works such as Jappelli (1990), Cox and Jappelli (1993), Duca and Rosenthal (1993), and Crook (2001) focus on the U.S. and use the Federal Reserve Board’s Survey of Consumer Finance data. Other empirical works mostly focus on the OECD countries: Crook and Hochguertel (2005) for the U.S., Italy and the Netherlands; Magri (2002) for Italy; Del-Rio and Young (2005), and Benito and Mumtaz (2006) for the U.K.

Recent studies indicate that household income and age of the household head are important determinants of demand for debt. In recent empirical evidence for the U.S. (using data from 1990-95), Crook (2001) finds that a household demands less debt when the head of household is over 55 years old and when he/she is relatively risk averse. A household demands more debt when its income is higher, when it owns a home, when the family size is larger and when the head is working. Lower probability of credit constraint is observed when a household owns a home, has high net worth and the head is older than 55, and has spent many years at a job. For Italy, Magri (2002) finds that the role of income is important, with the uncertainty of income reducing the demand for loans. In addition, residence is a crucial parameter for credit rationing, which is particularly strong in regions where banks face a longer recovery time in the event of customer default.

Crook and Hochguertel (2005) explore credit demand and credit constraints in the U.S., Italy and the Netherlands. They find that higher age and wealth reduces the chance of being constrained. The self-employed face a greater chance of being discouraged or turned down in all three countries, especially in the U.S. They also find that a much greater proportion of U.S. households apply for credit than for the other two countries. Of those who apply, a much higher proportion are rejected in the U.S. Once households that are discouraged from applying are included, a considerably smaller percentage of Italian and Dutch households are credit constrained, compared with U.S. households.

Del-Rio and Young (2005) examine the determinants of participation in the unsecured debt market and the amount borrowed for 1995 and 2000 in the U.K. Age, income, positive financial prospects and housing tenure are found to be significant for the probability of participation. For the level of borrowing, income is the main variable explaining the cross- sectional differences in unsecured debts.

To our knowledge, there are two relevant empirical studies on this topic in emerging market countries. Using household surveys from Thailand, Thaicharoen, Ariyapruchya and Chucherd (2004) analyze credit demand and constraints and find that low income, low age, low educational attainment, and occupations such as farm operator or low-skilled laborer tend to be associated with greater demand for loans. They also find that high income, high age, being female, a farm operator or having an education at the secondary level or above tend to reduce the likelihood of being credit constrained. Arvai and Toth (2001) estimate Hungarian consumers’ propensity to borrow using a 2000 household survey. They find that the education level of the head of household, household income, future income expectations and past borrowing experience have positive effect on the propensity to borrow.

III. Methodology

The decision to enter the credit market depends on both credit demand and supply. Observed debt levels can thus be considered the result of a multistage decision process, where demand is potentially rationed by supply (Figure 1):

Figure 1.Household Multistage Decision Process

A household may or may not have demand for credit. If a household has demand for credit, it may or may not apply for a loan, as it may be discouraged by the prospect of possible rejection or its inability to afford debt services in the future. Then, if the household is not discouraged, and applies for a loan, it may be rejected by the lender. Households that are not rejected will end up having positive debt. The decision process thus shows that there are many ways in which the observed debt holding may take a value of zero. Expectations, especially about future income, play a key role in the decision process of the households.

Estimation models

We set up estimation models that take into account the multistage decision process of household credit demand. We first estimate separately the outcome of two decision processes: (i) the probability of having demand for credit (or credit market participation); and (ii) the probability of credit constraint. Then we estimate (iii) the desired amount of debt.

We introduce the equations for the two decision process which are based on the “latent” demand and supply functions:

(i) Credit market participation

An individual’s desired stock of debt depends on a set of explanatory variables, X1, and can be represented by the latent demand function LD in equation (2). LD is an unobservable or latent continuous random variable. X1 is a vector of variables that determines whether a person would desire to hold positive debt, and εD is a random error term.

We are only able to observe whether individuals have positive demand for debt through observable information from the survey questionnaire. We define another variable—d so that

Here, d is observable. We identify d=1 if an individual has made an attempt to borrow or has been discouraged from borrowing.2 We define d=0 if an individual has not attempted to borrow because she has no need. We exclude individuals who have not attempted to borrow because of other reasons.3 We estimate a probit model with d as a dependent variable in a pooled and random effect panel specification4.

(ii) Credit constraint

On the supply side, although an individual may want positive debt, she is subject to the lender’s evaluation in equation (3). LS is an unobservable continuous random variable. And X2 is a vector of variables that affect the lender’s decision to grant a debt or not.

If Ld >LS, such individual is credit constraint. We define a corresponding binary variable s so that:

Here, s is observable through the survey questionnaire. We define s = 0 if an individual has attempted to borrow but has been refused, or has been discouraged. We identify s = 1 if an individual was able to obtain a loan. We estimate a probit model with 1-s, i.e. the probability of being constrained, as a dependent variable in a pooled and random effect panel specification.

(iii) Desired amount of debt

We suppose an individual’s desired stock of debt—DD is associated with a set of variables, which are indicated by a vector X, such that

where εDD is the random error term.

We estimate equation (3) by (a) a simple regression; and (b) a two-step Heckman selection model.

Based on our data set, DD is not directly observable. We can observe only the amount of debt each individual has obtained if the individual has a positive credit demand and is not totally credit constrained. If we estimate equation (3) using the observed amount of debt as the dependent variable, we may run into a selection bias problem, as the observable amount of debt is subject to two selection mechanisms.

To take into account the two selection mechanisms, we estimate desired debt through the Heckman selection model (Heckman, 1979) using inverse Mills ratios (IMRs).5 The basic model comprises of two steps. We use the estimates from the two selection equations (from part (i) and part (ii) to include every individual who wants to participate in the credit market. In the second step, we estimate the desired stock of debt given the extra information obtained from the first step.

In the second step of the Heckman model, we include the two IMRs into the desired debt function. First, the conditional expectation of desired debt (equation (3)) can be expressed as follows:

Suppose (εDD, εD, εS) are all normally distributed with variance(σ,1,1); then the covariance matrix will be

Thus, E (ε|d = 1, s = 1) = E(ε|εD > −α′ X1, εs > −γ′ X2) = σDD,DMDD, D+σDD,sMDD,s. If εS and εD are uncorrelated, then MDD D and MDD S are the IMRs from equations (2) and (3). If they are correlated, we can estimate MDD D and MDD S through a bivariate probit model. In our model, however, we assume that εS and εD are uncorrelated and therefore that Mdd d and Mdd s can be directly computed from the selection equations. Therefore, we include the two inverse Mills ratios into the desired debt function (1) as follows:

All estimations are done using both a pooled ordinary least squares (OLS) and a panel estimation. In the panel specification, we use the selection correction methodology as in Wooldridge (1995). Following Crook (1996) and Duca and Rosenthal (1993), we assume that the same variables determined the probability of having debt and the amount borrowed (allowing for different parameters in the participation and debt equations). This is due to the difficulty in arguing for a strong theoretical case to include supplementary variables that affect participation decision but do not influence the amount of borrowing for identification purpose. We therefore also estimate equation (3) using simple regressions without any selection model (similar to the approach in Del-Rio and Young (2005)). The results from the two estimations do not differ much, especially in the total sample.

One caveat to the estimation is that even if we observe a positive debt holding, we do not know whether the individual may be partially constrained because we have no information about the lender’s evaluation of the debt request. Similar to Crook (2001) and Magri (2002), we treat positive debt holding as no credit constraint, bearing in mind that we may underestimate the probability of being credit constrained.

Relevant variables

In this section we discuss the relevant variables in our estimation models. Table 1 summarizes some of the main independent variables and their expected effects on the three dependent variables.

Table 1.Independent Variables and Their Expected Relationships with Debt Demand and Supply
AgeInverted-U shape+
Net wealth-+
Current income+/-+

On the demand side of the credit market, age is one of the most important factors suggested by theory. Young households and individuals are likely to have a high demand for debt because of their expectation of higher income and higher consumption in the future compared with their current low income. As their age increases, their income becomes higher which make them less likely to borrow because they have enough income to support their demand. We can expect that there is a certain age threshold beyond which the desired debt will stop growing and start falling. In other words, the relationship between the probability of borrowing and age is expected to have an inverted U shape. The lenders, however, are likely to favor older borrowers as their ability to pay is higher. In order to capture this nonlinear relationship, we use both linear and quadratic terms of age as independent variables.

The second important factor is net wealth. On the supply side, net wealth is a good measurement of the borrower’s repayment ability. The higher the net wealth is, the higher the probability of obtaining a loan. On the demand side, however, given higher net wealth, an individual can afford more desired consumption and may not need to borrow.

We use proxies for net wealth. Unfortunately Living in BiH does not contain information on net wealth or total assets; asset-related data include only household durables, and there is no information on housing value or financial assets. We therefore use the total value of household durables as the main proxy for net wealth. Home ownership dummies are also used as another proxy for net wealth. There are three types of residencies in BiH: owner, renter and temporary stay (including occupying it for free or illegal stay).

Income is another important factor. From the lender’s point of view, what matters is the expected income in the future rather than current income. We use education dummy variables to proxy the expected income profile, following our assumption that the probability of obtaining a loan will be higher for individuals with higher education levels. Our education dummy variables represent individuals who have finished at the zero, primary, secondary, vocational, two-year college and four-year university levels. We can also expect that lenders would prefer higher-educated customers because they usually have lower income volatility and, therefore, smaller default risk. The relationship between current income and debt is, however, not certain. Normally, the higher the current income, the smaller the amount of debt demand. However, the amount of debt demanded may be larger as current income increases, especially if the increase is triggered by a permanent income shock. Again, to capture the possible nonlinearity in the relationship, we use both the linear and quadratic terms.

Other socioeconomic variables that are thought to affect debt supply and demand include family size, gender, labor market status, and status in the household. Individuals in a large family are more likely to borrow than those in a smaller family as the large family is more likely to have a higher dependency ratio. To capture the effect of gender, a dummy for female is included. On labor market status, we divide individuals into four groups— dependent workers, self-employed, unemployed and inactive.6 We expect that, compared with people who are employed, the unemployed individuals may be more likely to demand debt because they have no current income, especially if the unemployment is temporary in nature. At the same time, they will be more likely to be rejected by the lenders. We also run the estimations only for employed individuals to see the effect of different types of employment. We divide employed people into the following groups—entrepreneur, self- employed, public sector employee, private sector employee, farmers, those with unpaid jobs and those with other jobs. The head of household dummy variable is also included to capture the different status within the household. The lender is more likely to take into account whether the potential borrower is the head of the household as the head has more power than other household members in controlling household assets.

We include dummies for entities and level of urbanization because the risk level in the residence area may also affect both the demand and supply of credits. In BiH, there are two main entities—the Federation of BiH (Federation hereafter) and the Republika Srpska (RS hereafter). Municipalities are divided into three groups: the urban area, rural area and mixed area. The poverty rate is higher in general in the rural area and unemployment rate is higher in the mixed area. In these areas of greater economic risks, lenders may be less inclined to supply credits. On the demand side, the effects are unclear.

For more details on the definition of the variables, see the Appendix.

IV. Data

We use a panel data set “Living in BiH” which covers individual-level and household-level socioeconomic information, as well as some household finance variables for the period 2001-2004 (see the Appendix for more details on the data set). Because the data are more complete for 2001 and 2004, we use only the data from these two years.

Overall summary statistics show that the demand for debt in BiH increased over the period, while credit constraint also went up. The statistics also suggest significant financial deepening during the period. There are also some noticeable differences in the characteristics of those who were constrained, those who were unconstrained, those who had debt, and those who had no debt.

Table 2 shows the overall picture of participation and constraint status in 2001 and 2004. Bosnian individuals’ desire to participate in the credit market increased from about 40 percent of the sample to 47 percent over the four-year period. Given the need, about 75 percent of the sample reported that they were constrained in 2001. That figure increased to about 80 percent in 2004.

Table 2.Credit Market Participation and Credit Constraint, 2001 and 2004
Debt situation20012004
Need debt (percent of total)39.747.1
Contrained given need (percent of those who need debt)75.480.5
Unconstrained given need (percent of those who need debt)24.619.5

Of those who were constrained, more than 90 percent were discouraged from borrowing, and only 5-8 percent were refused a loan (Table 4).

Table 3.Type of Credit Constraint, 2001and 2004 (in percent)
Credit constrained20012004
Refused a loan7.64.8
Discouraged from borrowing92.495.2
Table 4.Main Reasons for Obtaining Loans and Not Attempting to Borrow, 2001 and 2004 (In Percent)
Main reason for obtaining loans2001Main reason for not attempting to borrow20012004
Buy inputs/working capital2.5No need35.527.4
Investment in equipment/lands/building/animals5.4Believed would be refused9.713.1
Consumption needs73.4Too expensive14.914.8
Consumer durables1.7Inadequate collateral7.013.5
Purchase dwelling1.3Do not like to be in debt19.119.2
Reconstruction of dwelling13.1Do not know any lender10.74.7

Table 4 detail the main reasons for obtaining loans and not attempting to borrow. In 2001, the main reason for obtaining loans was for consumption needs. The same data are not available for 2004. For those who did not attempt to borrow, the main reason was that there was no need. The need increased over the four-year period, as shown in Table 2. The share of those who believed that they would be refused and those with inadequate collateral went up over the years, while the share of individuals who did not know any lender fell in 2004 to about half of the 2001 figure.

Those who applied and were refused were mainly refused by friends and other institutions in 2001 (Table 5).7 However, in 2004, 40 percent of the refusals came from banks, which mainly reflects the process of financial deepening, as borrowers were moving away from informal sources towards banks.

Table 5.Refusal by Type of Lender, 2001 and 2004 (In percent)
Refused by20012004
Government agency9.70.0
Credit union2.49.2
Other individual6.116.3
Other institution25.73.2

Table 6 presents the sample mean values of the variables used for the analysis. The sample is divided into five groups: those who need debt, are constrained, are unconstrained, have debt, and have no debt. Comparing individuals who have debt, and those do not, average income is significantly higher for those with debt. The employment rate of those with debt is also much higher than those without. The same holds when comparing constrained and unconstrained individuals. Unconstrained ones have significantly higher average income, slightly higher average age, and much higher employment rate. The percentage of female in the constrained group is also significantly higher than in the unconstrained group. The difference in the level of education attainment between the two groups is not obvious.

Table 6.Sample Means (Weighted)
VariableTotal SampleNeed debtConstrainedNot constrainedHas debtNo debt
Number of observations3,6045,3181,4082,6071,0722,0783385292624493,3424,869
Individual income (in KM)5,3607,4944,6036,9094,3756,7495,2837,5615,2077,9905,3737,447
Value of household durables (in KM)2,4643,1582,0532,6032,0292,5012,1253,0162,1073,2842,4943,146
Individual debt (in KM)1482581,9322,99800
Log income3.974.884.494.893.844.386.476.966.437.083.764.68
Log durables7.017.326.757.126.747.056.787.386.787.487.037.31
Age (year)43.4243.1945.7842.7144.8842.1148.1945.1547.8544.3443.0543.08
Family size (in number of persons)3.573.943.474.053.474.093.503.903.623.963.573.94
Education variables (in percent)
No education21.1016.7019.6015.2019.9016.3018.6010.8017.9010.8021.3017.30
Primary education29.1027.2032.7028.1034.4029.0027.6024.8026.1024.1029.4027.50
Secondary education28.4030.1029.5033.2029.1032.4030.5036.8031.9035.6028.1029.60
Vocational education15.9020.5012.6018.8012.0018.7015.6019.1015.2020.2016.0020.50
College (2-year) education2.802.903.002.803.102.402.804.
University (4-year) education2.602.602.501.901.701.304.904.305.605.102.302.30
Labor market status (in percent)
Employed by employers27.3034.6030.4039.3022.0034.1056.3060.4058.1064.2024.7031.80
Self Employed3.807.104.407.104.206.404.8010.004.5010.503.706.80
Gender (in percent)
Entity (in percent)
Republika Srpska (RS)44.2041.3039.2048.3033.4049.6056.2043.0053.2041.0043.5041.30
Type of residence (in percent)
Other type of residence3.106.004.407.703.707.206.409.604.908.502.905.80
Urbanization level (in percent)
Urban area14.4013.2013.4012.1015.1012.308.0011.307.5011.1015.0013.40
Mixed area38.7035.6042.3040.9041.5040.7044.4041.7041.6041.0038.4035.10
Rural area47.0051.2044.3047.0043.4046.9047.6047.1050.9047.9046.6051.50
Status in household (in percent)
Head of household37.0040.2050.2044.5041.3037.6076.1072.5077.7072.2033.6037.20
Other member of household63.0059.8049.8055.5058.7062.4023.9027.5022.3027.8066.4062.80

V. Empirical Results

Although a households is usually assumed to be one decision-making unit, the empirical work here employs data at the individual level to maximize the variation and the number of observations. Maximizing the number of observations is especially important in estimating the amount of desired debt because the number of those with debt is quite low. The results largely hold when we use household-level data and the characteristics of the heads of households.8

Table 7 shows the results of the probit estimations on the probability of credit market participation and Table 8 presents the marginal effects of the estimations. The results from both pooled and panel estimations are presented in the table. The estimations are run using the total sample and the sample of employed individuals.

Table 7.Results of Probit Estimations of Credit Market Participation
Pooled, total

Panel (RE), total



Panel (RE),


Base unit
Log income0.083***0.087***0.086**0.086*
Log income squared-0.010***-0.011***-0.010**-0.010*
Log durables0.238***0.246***0.226***0.237***
Log durables squared-0.028***-0.029***-0.024***-0.025***
Age squared-0.001***-0.001***-0.001***-0.001***
Primary education0.123***0.131***0.1340.147No education
Secondary education0.134***0.143***0.172*0.191*No education
Vocational education0.0580.0670.0310.043No education
College (2 year) education0.0780.0840.1810.197No education
University (4 year) education-0.087-0.093-0.141-0.150No education
Family size0.059***0.061***0.064***0.067***
Entrepreneur-0.065-0.057Public sector employee
Self-employed-0.077-0.083Public sector employee
Private sector employee-0.0040.002Public sector employee
Other jobs0.1740.197Public sector employee
Farmers-0.098-0.086Public sector employee
Unpaid job-0.037-0.026Public sector employee
Self-employed-0.078-0.077Employed by employers
Unemployed0.0610.063Employed by employers
Inactive-0.182***-0.191***Employed by employers
Other type of residence0.131*0.145*0.0790.085Renter
Head of household0.328***0.345***0.297***0.317***Household member
Federation & urban-0.244***-0.257***-0.353***-0.373***Federation & rural
Federation & mixed-0.056-0.058-0.097-0.101Federation & rural
RS & urban0.0500.0540.0000.003Federation & rural
RS & mixed0.0330.037-0.123*-0.123Federation & rural
RS & rural-0.170***-0.174***-0.179***-0.184**Federation & rural
Sample Size8,922.0008,922.00036083608
Wald chi2639.98558.91214.98182.64
Pseudo- R^20.05620.0456
*, ** and *** indicate significant level at 10, 5 and 1 percent respectively.
*, ** and *** indicate significant level at 10, 5 and 1 percent respectively.
Table 8.Marginal Effects of Probit Estimations of Credit Market Participation
Pooled, total

Panel (RE),

total sample


Panel (RE),


Base unit
Log income0.033***0.035***0.034**0.034*
Log income squared-0.004***-0.004***-0.004**-0.004*
Log durables0.094***0.097***0.090***0.094***
Log durables squared-0.011***-0.011***-0.010***-0.010***
Age squared-0.000***-0.000***-0.000***-0.000***
Primary education0.049***0.052***0.0530.058No education
Secondary education0.053***0.057***0.069*0.076*No education
Vocational education0.0230.0270.0120.017No education
College (2 year) education0.0310.0330.0720.079No education
University (4 year) education-0.034-0.037-0.056-0.060No education
Family size0.023***0.024***0.025***0.027***
Entrepreneur-0.026-0.023Public sector employee
Self-employed-0.031-0.033Public sector employee
Employed in the private sector-0.0020.001Public sector employee
Other jobs0.0690.078Public sector employee
Farmers-0.039-0.034Public sector employee
Unpaid job-0.015-0.010Public sector employee
Self-employed-0.031-0.031Employed by employers
Unemployed0.0240.025Employed by employers
Inactive-0.072***-0.076***Employed by employers
Other type of residence0.052*0.057*0.0320.034Renter
Head of household0.130***0.136***0.118***0.126***Household member
Federation & urban-0.097***-0.102***-0.141***-0.149***Federation & rural
Federation & mixed-0.022-0.023-0.039-0.040Federation & rural
RS & urban0.0200.0210.0000.001Federation & rural
RS & mixed0.0130.015-0.049*-0.049Federation & rural
RS & rural-0.067***-0.069***-0.071***-0.073**Federation & rural
*, ** and *** indicate significant level at 10, 5 and 1 percent respectively.
*, ** and *** indicate significant level at 10, 5 and 1 percent respectively.

Table 9 reports the probit estimation results on the probability of credit constraints and Table 10 presents the marginal effects of the estimations. Results from both pooled and panel specifications are reported. The estimations are run using the total sample and the sample of employed individuals.

Table 9.Results of Probit Estimations of Credit Constraint
Pooled, total

Panel (RE),

total sample


Panel (RE),


Base unit
Log income0.173***0.205***0.132*0.151*
Log income squared-0.028***-0.033***-0.019**-0.023**
Log durables0.182***0.227***0.282***0.356***
Log durables squared-0.017***-0.021***-0.028***-0.036***
Age squared0.001***0.001***0.001***0.001***
Primary education0.0080.003-0.084-0.140No education
Secondary education0.0810.1000.007-0.013No education
Vocational education-0.012-0.020-0.157-0.220No education
College (2 year) education-0.000-0.0300.0270.008No education
University (4 year) education-0.032-0.061-0.129-0.223No education
Family size0.0250.0310.0390.053*
Entrepreneur0.2150.277Public sector employee
Self-employed0.0850.048Public sector employee
Employed in the private sector0.252***0.310***Public sector employee
Other jobs0.432*0.541*Public sector employee
Farmers0.278**0.361**Public sector employee
Unpaid job0.743***0.921***Public sector employee
Self-employed0.0280.052Employed by employers
Unemployed0.293***0.359***Employed by employers
Inactive0.325***0.393***Employed by employers
Other type of residence-0.299***-0.370***-0.458***-0.563***Renter
Head of household-0.534***-0.653***-0.556***-0.714***Household member
Federation & urban-0.085-0.111-0.047-0.062Federation & rural
Federation & mixed0.0130.0100.0680.088Federation & rural
RS & urban-0.035-0.0560.1270.158Federation & rural
RS & mixed-0.200**-0.252**-0.088-0.128Federation & rural
RS & rural-0.382***-0.467***-0.251**-0.309**Federation & rural
Sample Size4,0174,0171,7471,747
Wald chi2591.04240.72229.1192.78
*, ** and *** indicate significant level at 10, 5 and 1 percent respectively.
*, ** and *** indicate significant level at 10, 5 and 1 percent respectively.
Table 10.Marginal Effects of Probit Estimations of Credit Constraint
Pooled, total

Panel (RE),

total sample


Panel (RE),


Base unit
Log income0.044***0.042***0.047*0.049*
Log income squared-0.007***-0.007***-0.007**-0.007**
Log durables0.047***0.046***0.099***0.116***
Log durables squared-0.004***-0.004***-0.010***-0.012***
Age squared0.000***0.000***0.000***0.000***
Primary education0.0020.001-0.030-0.045No education
Secondary education0.0210.0200.002-0.004No education
Vocational education-0.003-0.004-0.055-0.072No education
College (2 year) education-0.000-0.0060.0090.003No education
University (4 year) education-0.008-0.012-0.045-0.072No education
Family size0.0060.0060.0140.017*
Entrepreneur0.0760.090Public sector employee
Self-employed0.0300.016Public sector employee
Employed in the private sector0.089***0.101***Public sector employee
Other jobs0.152*0.176*Public sector employee
Farmers0.098**0.117**Public sector employee
Unpaid job0.262***0.300***Public sector employee
Self-employed0.0070.025Employed by employers
Unemployed0.075***0.021***Employed by employers
Inactive0.083***0.019***Employed by employers
Other type of residence-0.077***0.029***-0.162***-0.183***Renter
Head of household-0.137***0.016***-0.196***-0.232***Household member
Federation & urban-0.0220.022-0.017-0.020Federation & rural
Federation & mixed0.0030.0220.0240.029Federation & rural
RS & urban-0.0090.0240.0450.051Federation & rural
RS & mixed-0.051**0.021**-0.031-0.042Federation & rural
RS & rural-0.098***0.021***-0.089**-0.100**Federation & rural
*, ** and *** indicate significant level at 10, 5 and 1 percent respectively.
*, ** and *** indicate significant level at 10, 5 and 1 percent respectively.

Tables 11 reports the results of the estimations of desired debt level. We show the results for OLS estimations and estimations with Heckman selection models, both for pooled and panel specifications. The OLS estimations only include individuals with positive debts; they do not take into account individuals who may have a positive demand but were discouraged from the market, or those who requested a loan but were rejected. The estimations with the Heckman selection model take into account two selection equations that identifies the probability of participating in the credit market and the probability of being credit constrained. The results show that the coefficients of the IMRs of the credit-rationing selection equation are significant only in the employed sample. We therefore focus on the OLS pooled and panel results for the estimations using total sample, and Heckman model for the estimations using employed sample.

Table 11.Estimations of Desired Stock of Debt
Pooled OLS,

total sample
Panel (RE),

total sample


pooled, total



panel, total

Pooled OLS,


Panel (RE),










Log income-0.474***-0.471***-0.475**-0.475**-0.630***-0.624***-0.893***-0.755***
Log income squared0.055***0.055***0.055*0.055*0.067***0.067***0.111***0.093***
Log durables-0.077-0.056-0.100-0.122-0.166-0.142-0.622-0.439
Log durables squared0.024***0.022***0.0270.0280.031***0.028***0.0750.058
Age squared-0.000-0.000-0.000-0.000-0.000-0.000-0.003*-0.003*
Primary education0.2030.2190.1880.1940.2740.2850.759**0.800**
Secondary education0.437***0.461***0.425*0.430*0.503**0.518**0.750*0.824**
Vocational education0.334**0.362**0.327*0.343*0.484**0.499**0.986***0.965***
College (2 year) education0.341*0.381**0.3320.365*0.505**0.531**0.7230.828*
University (4 year) education0.691***0.747***0.706**0.751***0.709***0.747***0.7210.775
Family size0.0310.0290.0250.0180.062*0.060*0.0440.054
Employed in the private sector-0.164-0.154-0.988**-0.835**
Other jobs-0.074-0.056-1.249-0.964
Unpaid job-0.818**-0.803**-3.526**-3.026**
Other type of residence-0.055-0.012-0.089-0.0340.1630.1861.799**1.519**
Head of household0.334***0.316**0.2540.2790.267*0.2592.691**2.413**
Federation & urban0.1400.1200.1690.1660.0550.050-0.429-0.476
Federation & mixed-0.072-0.075-0.065-0.067-0.138-0.141-0.508*-0.477
RS & urban0.366**0.375***0.357**0.358**0.382**0.396**-0.0250.053
RS & mixed0.1060.1160.0890.1070.0800.0890.1860.172
RS & rural0.122**0.124**0.1210.1590.120**0.131**0.6400.497
Inverse Mills Ratio 1-0.220-0.3362.9442.836
Inverse Mills Ratio 2-0.0860.0604.839*3.064*
invmills1_2004 dummy0.1780.053
invmills2_2004 dummy-0.0470.097
Sample Size867**867**867**867**584**584**584**584**
Root MSE1.107**1.1091.104**1.102
*, ** and *** indicate significant level at 10, 5 and 1 percent respectively.
*, ** and *** indicate significant level at 10, 5 and 1 percent respectively.


We now discuss the results of each potential explanatory variable and its effect on the participation decision, credit constraint and the amount of desired debt.


As expected, following the life-cycle model of consumption and previous empirical works, the probability of credit market participation is a concave function of age, and the coefficients for age and age-squared are highly significant in all specifications. Individuals, in their 20-30s prefer to borrow more as their age increases. After hitting a certain age threshold, this probability declines. Our analysis shows that the threshold age for Bosnia is around 45.

The age profile is also significantly associated with the probability of credit constraint. The probability is high at younger ages and decreases as age increases until it reaches the minimum at around 47 years, which is very close to the threshold age on the demand side. Beyond that age, credit constraints increase with age. Lenders prefer to grant loans to middle- aged individuals rather than to the young and the old because the former generally have more stable income streams and higher net wealth, which leads to lower credit risk.

For the amount of debt desired, age is significant only in the estimations with employed sample.

Net wealth

The results show that the relationship between the probability of credit market participation and log of durables—our proxy for net wealth—follows a hump-shaped pattern. Although we expect that net wealth has a negative relationship with demand, it seems that such relationship holds only once individuals have been endowed with a certain level of net wealth. From a low net wealth level, individuals want to borrow as their net wealth becomes higher. One explanation could be that individuals are more likely to borrow once they acquire some assets to use as collateral. However, as wealth increases beyond a certain point, individuals have less need to borrow as their wealth can generate enough income for consumption.

The relationship between the probability of credit constraint and durables—our proxy for net wealth—also follows a hump-shaped pattern, with the maximum very close to zero. Therefore, for most people, higher wealth means a lower probability of being constrained, as expected. A high value for durables, however, does not significantly affect the amount of desired debt.

Compared with being a renter, being a homeowner—our second proxy for net wealth—is not significantly associated with the probability of credit participation or constraint. This may be because the homeownership rate is already very high across the board. However, homeowners tend to have larger amounts of desired debts. This could be due to the collateral value effect.

Current income

The relationship between the probability of credit market participation and the log of income follows a hump-shaped pattern. Both first-order and second-order terms are significant. When income is very low, the marginal utility of consumption is very high. This translates into strong demand for debt as most household debt in BiH is for consumption purposes. Once income is higher, individuals can spend it to consume and need to borrow less. Similar to the relationship with durables, the maximum point is at a very low income level, suggesting that the relationship between income and demand is negative for most individuals.

The probability of credit constraint is concave to log income. Again, both first-order and second-order terms are significant, and the maximum point is very close to zero, which implies a negative relationship between income and credit constraint for most people.

Income appears to have the strongest and most significant impact on the amount of desired debt. The relationship between this desired debt amount and current income follows a convex pattern although the minimum point is very small. Beyond that point, as income increases, most individuals would like to borrow more.

Educational level

Although we expect that the relationship between education level and credit market participation will be positive, our results show that the relationship follows a hump-shaped pattern. The coefficients for primary and secondary education variables are positive and significant. For higher education levels, the coefficients are still positive but closed to zero and not significant. The coefficient for four-year university education, however, is negative but insignificant. This could reflect the situation that highly educated individuals already enjoy high income and wealth, and have little need to borrow.

In contrast to the results from the credit market participation estimations, none of the coefficients of education variables are significant in the credit constraint equation. Controlling for other characteristics, individuals with higher education can face as much credit constraint as ones with lower education. There are two possible explanations. First, the lenders may not see that education level is a good proxy for permanent income and, therefore, may not include it in their decision factors. The second possible explanation is that, although educated individuals have higher permanent income, they also request much more debt than individuals with lower education. In other words, as the education level increases, debt demand grows faster than debt supply.

The coefficients of education variables, except for the primary education dummy, are positive and significant in the estimations of the amount of desired debt with total sample. Individuals with higher education demand larger amounts of debt. The effect is strongest for four-year university education. The results imply that, although individuals with higher education are less likely to participate in the credit market, they demand larger amounts of debt once they decide to enter the market. In the sample of employed individuals, however, only the dummies for primary, secondary and vocational education are significant.

Other household/personal characteristics

As expected, family size is positively correlated with credit need. Larger family size implies higher credit need, and the coefficients are significant in all specifications. However, larger family size is not significantly associated with higher credit constraints. In the equation for amount of desired debt, the coefficient of family size variable is also positive but not significant.

With respect to the gender variable, males and females do not significantly differ in their probability of participation, or being credit constrained. However, females are likely to desire larger amount of debt. As for the variable for the status in the household, the head of household tends to have higher probability of participation, be less credit constrained than other family members and demand higher amount of debt. This reflects the head of household’s influence over the household assets and consumption decision.

Labor market status

The probability of credit market participation does not differ significantly for unemployed and employed individuals. Inactive individuals such as students, housewives and disables have a lower probability of participation than employed ones. This may be because, even if they have no stable income, many of them receive financial support from other family members and thus do not need to enter the credit market themselves. For employed individuals, however, there is no difference in credit need among different types of employment.

Unemployed and inactive individuals are significantly more credit constrained and desire less debt than employed ones. When considering only employed individuals, those who work for the private sector, are farmers, or work for other jobs or unpaid jobs, are significantly more credit constrained than public sector employees. The coefficients, while positive for entrepreneurs and self-employed, are not significant. These results suggest that job security is an important deciding factor from the lenders’ point of view. Individuals working for the private sector may be more constrained because their jobs may be in the informal sector, which is relatively large for the size of the economy.


Compared to individuals in the rural area of the Federation—our base group—individuals in the rural RS have significantly lower probability of participation and a lower probability of being credit constrained. At the same time, individuals in the urban area of the Federation are less likely to participate in the credit market. Those in the mixed area of the RS are also less credit constrained, compared to the base group.

Results in international perspective

In this section we compare our results for BiH with the empirical results for other countries from Arvai and Toth (2001), Crook (2001), Crook and Hochguertel (2005), Del-Rio and Young (2005), Magri (2002), and Thaicharoen, Ariyapruchya and Chucherd (2004).9 Although results from different studies may not be directly comparable because the measurements of debt in each paper are not exactly the same, this comparison helps shed light on the institutional or structural differences between these countries.10

For credit market participation, we observe the following (Table 12):

Table 12.Credit Market Participation: International Comparison of Empirical Estimations
BiHItalyThe NetherlandsUKUSHungaryThailand
AgeInverted-U shape with a maximum at 49Inverted-U shape with a maximum at 35Inverted-U shape with a maximum at 30Inverted-U shape with a maximum between 20-30Inverted-U shape with a maximum of around 30-Inverted-U shape
WealthInverted-U shapeInverted-U shape-Negative relationship only for those with higher-than- median financial wealth-N/AN/A
IncomeInverted-U shapeInverted-U shape++Inverted-U shape+-
Education qualificationInverted-U shape, although higher education dummy negative but not significantNo significant effectNo significant effect+++Inverted-U shape
UnemploymentNo significant effect----N/AN/A
Other labor market statusLower probability for inactiveLower probability of mortgage demand for self- employed. No significant effect for consumer loans demandNo significant effectLower probability for self-employed, retired and students.Lower probability for no paid job, retired and disabled.N/AHigher probability for farm operator and laborer
Female (Male)No significant effectNo significant effectNo significant effect+No significant effectN/AN/A
StudiesChen and Chivakul, 2008Magri, 2002 and Crook and Hochguertel, 2005Crook and Hochguertel 2005Del-Rio and Young, 2005Crook, 2001 and Crook and Hochguertel, 2005Arvai and Toth, 2001Thaicharoen, Ariyapruchya and Chucherd, 2004
  • Age significantly affects the probability of participation in all countries in the same way.11 One important distinction is that the probability of participation reaches the maximum at age 45 in BiH, while the maximum age in other countries is much lower at around 30 years old. In BiH, both the young and the middle aged want to borrow, while in other countries the need for borrowing starts to decline sooner. This may be because of the post-conflict and transitional nature of BiH. After the conflict, the need to borrow may be equally distributed over the age profile because households need to repair their dwellings and replace destroyed durables. Moreover, individuals who would have settled down (and needed to borrow for family expansion and home purchase) in their 30s in the early 1990s had to postpone for another 5-10 years due to the war. As a country that started its transition period later than other countries in the region due to the conflict in the mid- 1990s, Bosnian individuals may have had access to finance for the first time during the observed period and thus been more likely to participate in the credit market regardless of age.

  • The effects of current income and education vary across countries. The relationship between credit constraint and income follows a hump-shaped pattern in BiH, Italy and the U.S.; the relationship is positive in the Netherlands, the U.K. and Hungary and negative in Thailand. The relationship between education level and credit market participation follows a hump-shaped pattern in BiH and Thailand. In other words, primary education significantly increases the likelihood of participating in the credit market, but university education reduces the likelihood. In Hungary, the U.S. and the U.K., however, the higher the education qualification, the higher the probability of participation. Education variables have no impact on participation in the Netherlands and Italy.

For the probability of credit constraint, we observe the following (Table 13):

Table 13.Credit Constraint: International Comparison of Empirical Estimations
BiHItalyThe NetherlandsUSThailand
AgeU shape with minimum at 48Less constraints for age above 65Less constraints for age above 50Less constraints with higher age starting from age 30-
WealthInverted-U shape- (Crook and Hochguertel, 2002)

No significant effect (Magri, 2002)
IncomeInverted-U shape-No significant effect--
Education qualificationNo significant effectLess constraints with high school educationNo significant effectHigher constraints with high school or college education-

+No significant effectNo significant effectNo significant effectN/A
Other labor market

More constraint for inactive.

Compared to those working for the public sector, working for the private sector, in unpaid jobs and farmer are more constrained.
More constraint for self-employedMore constraint for self-employedMore constraint for self-employedCompared to unemployed, farm operator is less constrained while laborer is more constrained.
Family sizeNo significant effectMore constraint with higher number of childrenNo significant effectMore constraint with higher number of childrenN/A
Female (Male)No significant effectNo significant effectNo significant effect--
StudiesChen and Chivakul, 2008Magri, 2002 and Crook and Hochguertel, 2005Crook and Hochguertel 2005Crook, 2001 and Crook and Hochguertel, 2005Thaicharoen, Ariyapruchya and Chucherd, 2004
  • The first interesting difference is the relationship between age profile and credit constraint. In BiH, the age profile exhibits a U-shaped pattern with the minimum at 47 years old. In other words, the probability of credit constraint declines with age until 47 years is reached. Beyond that, the probability starts increasing with age. In other countries, age has a significant and negative relationship with credit constraint. In the U.S., the negative relationship starts at 30 years, and the effect is most pronounced with ages 65 and higher.12 In the Netherlands and Italy, the negative relationship starts at 50 and 65 years old respectively13. In other words, older individuals are punished in the “credit-scoring model” in BiH while being old in other countries gives a higher score. Again, this may be because of the post-conflict and transitional nature of the country. Older individuals in BiH may face higher uncertainty in their income (i.e. through privatization of public companies or unreformed social benefit systems) or may have lost their liquid and fixed assets during the conflict.

  • Higher education in general reduces the probability of credit constraint in Italy and Thailand, but has a positive impact (Crook and Hochguertel, 2005) on the probability in the U.S. In BiH, as in the Netherlands, education variables have no significant effect on the likelihood of being constrained.

  • Being unemployed significantly increases the probability of credit constraint in BiH, but has no significant effect anywhere else. This may be explained by the fact that most unemployment in BiH is structural. As the unemployed are unlikely to get a job and improve their financial position in the future, the lenders are unlikely to lend to them. At the same time, being self-employed significantly increases the likelihood of being constrained in Italy, the Netherlands and the U.S., but has no significant impact in BiH and Thailand. This may reflect the smaller portion of the labor force in emerging markets being self-employed.

Lastly, with respect to amount of desired debt (Table 14):

Table 14.Amount of Desired Debt: International Comparison of Empirical Estimations
BiHItalyThe NetherlandsUKUSThailand
AgeNo significant effectNegative relationship.

Significant especially for age beyond 40
Inverted-U shapeInverted-U shapeInverted-U shapeInverted-U shape
WealthNo significant effect+ (Magri, 2002) - (Crook and Hochguertel, 2005)-Negative relationship only for those with higher- than-median financial wealth-N/A
IncomeU shape- (Magri, 2002) Positive only at the highest income level (Crook and Hochguertel, 2005)++Inverted-U shapeU shape with a minimum around the 50th percentile

++Positive university level+Negative relationship for completing high school. No significant effect for other education levels+
UnemploymentNo significant effectNo significant effectNo significant effect-No significant effectN/A
Other labor market

Lower for inactive, compared to employed. Lower for farmers and unpaid jobs, compared to employed in the public sectorHigher for self- employedNo significant effectHigher for self- employedHigher for self- employedN/A
Family sizeNo significant effectNo significant effect for number of childrenPositive relationship for number of children below age 6Negative relationship for number of dependent children++
Female (Male)+No significant effect--No significant effectN/A
StudiesChen and Chivakul, 2008Magri, 2002 and Crook and Hochguertel, 2005Crook and Hochguertel 2005Del-Rio and Young, 2005Crook, 2001 and Crook and Hochguertel, 2005Thaicharoen, Ariyapruchya and Chucherd, 2004
  • The debt amount significantly increases with higher income in all countries except Italy. Magri(2002) shows a negative and significant relationship between income and loan size; meanwhile in Crook and Hochguertel (2005), income is not a significant determinant, except for the Italians in the highest income group where the effect is positive. In addition, the size of the effect of income becomes smaller with higher income in the U.S., and the effect of income peaks at the middle-income group in the Netherlands; meanwhile the positive coefficient of the quadratic term of income in BiH and Thailand indicates that the effect does not level off at higher income. With demand for debt highest at lower- and middle-income groups, the patterns in the U.S. and the Netherlands seem to be consistent with the life-cycle model. One possible explanation for the high debt at high-income levels in BiH, Thailand and Italy may be that high-income individuals expect their future income to be higher. Therefore, the large amount of desired debt is a result of their rational decisions.

  • Another interesting difference is the effect of education. Higher education increases the desired stock of debt in all countries except the U.S., where finishing high school significantly reduces the amount of desired debt, according to Crook and Hochguertel (2005). Also having a college degree has no significant impact, according to Crook and Hochguertel (2005) and Crook (2001).

VI. Conclusions

This paper examines the determinants of Bosnian individuals’ credit market participation, credit constraint, and amount of desired debt using household survey panel data from 2001 and 2004. It is the first study of credit demand and credit constraint using micro-level data from Emerging Europe. The data show that about 80 percent of the Bosnian individuals who have positive demand for debt were constrained in 2004. Estimation models correcting for selection bias are used to empirically investigate the determinants. Following theory and previous empirical work, the relationship between the probability of credit market participation and age follows an inverted U-shaped pattern. However, the relationship has the maximum point at around age 45, which is much higher than what was found in previous studies on OECD countries. This possibly reflect the pent-up demand of all individuals after the war. Once this hump of credit demand is over, the maximum age may drop and credit growth may stabilize at a lower rate than the current real rate of about 26 percent.

The empirical results on the determinants of credit constraint help shed light on lending criteria or the factors underlying the credit-scoring model in BiH and highlight the impact of the post-conflict and transitional nature of the country on the behavior of lenders. As expected, high income and high wealth imply lower constraints, with the impact of income stronger than that of wealth. In contrast to previous empirical results in other countries, in which the older are less constrained (because lenders perceive them to have a smaller default risk), the relationship between the probability of being constrained and age in BiH follows a U-shaped pattern, with the minimum age around 47. This implies that older individuals in BiH may face higher uncertainty in their income or may have accumulated fewer liquid assets than their peers in the advanced countries, and are therefore more prone to default risks. Again, this possibly reflects the post-conflict and transitional nature of the country.

Moreover, the results on the determinants of credit constraint underscore the structural nature of unemployment as well as the mismatch between education qualifications and earning prospects in BiH. Education variables have no significant effect on the likelihood of being constrained, while, unlike in the advanced countries, being unemployed significantly increases the likelihood.

Income is the main variable explaining the amount of desired debt, similar to previous empirical results from other countries. In contrast to results from the U.S. and the Netherlands, the amount of desired debt in BiH is high at the high-income level. The relationship patterns with the demand for debt at the peak in the lower- and middle-income group in the U.S. and the Netherlands seem to be consistent with the life-cycle model. One possible explanation for the high debt at high-income levels in BiH (and similarly Thailand and Italy) may be that high-income individuals in these countries have higher future income expectations. Therefore, the large amount of desired debt may be a result of these individuals’ rational decisions.


Data Source

A Living Standards Measurement Study (LSMS) survey was conducted in BiH in 2001. This survey provides individual level and household level socio-economic data from 5,402 households drawn from urban and rural areas in the two entities of BiH, the Federation of Bosnia and Herzegovina (Federation) and the Republika Srpska (RS). The datasets are available on the World Bank’s website:,contentMDK:21485765~isCURL:Y~menuPK:4196952~pagePK:64168445~piPK:64168309~theSitePK:3358997,00.html

In 2002, 2003 and 2004, a sub-sample of the households interviewed in the 2001 LSMS were re-interviewed. The resulting panel data set is called “Living in BiH”. These surveys were carried out by the State Agency for Statistics for Bosnia and Herzegovina, the Republika Srpska Institute of Statistics and the Federation of Bosnia and Herzegovina Institute of Statistics. The questionnaire include modules on demography, education, health, housing, labor, social protection, finances and credit, and migration. The 2001 and 2004 questionnaire also include modules on consumption, non-agricultural and agricultural activities. The sample was designed to be representative at the country level.

Living in BiH provides a rich source of information. Not only does it include questions on income and consumptions, but it also contain certain questions on household assets and liabilities. On the assets side, households are asked to report whether they are homeowners, and whether own a number of consumer durables ranging from refrigerator, television, and computer to car. They are also asked to provide the current prices of these items (what they think they would get it they were to sell those items). The value of their dwellings, however, was not recorded. On the liability side, questions on the amount of outstanding debt, the lending source, and the reason for not borrowing, were asked. Individuals were also asked whether they have attempted to borrow, but were refused, and who refused them.

We only use positive income individuals in the study, and we take out the top 1 percent outlier for income and debt.

Variable Definition

Log incomeLog of individual net income in KM, which includes labor income, transfer from government, private-domestic transfer and private transfer from abroad
Log durablesLog of the value of household durables in KM
Log debtLog of the amount of the most recent loan in KM
AgeAge in year
Family sizeNumber of individuals in the household
Education level dummiesA dummy equal to one if an individual finished a certain level of education, and equal to zero otherwise.

The levels of education are no education, primary education, secondary education, vocational education, college (2 year) education and university (4 year) education.
Labor market status dummiesA dummy equal to one if an individual is in a certain group of labor market status, and equal to zero otherwise. The groups of labor market status are unemployed, employed by employers, self-employed and inactive.
Employment status dummiesA dummy equal to one if an individual is employed a certain type of job, and equal to zero otherwise.

The types of job are public sector employee, private sector employee, self-employed, entrepreneur, farmer, unpaid jobs and other jobs.
Female dummyA dummy equal to one for female, and equal to zero for male
Federation dummyA dummy equal to one if the individual resides in the Federation, and equal to zero if residing in the RS
Republika Srpska (RS)

A dummy equal to one if the individual resides in the RS, and equal to zero if residing in the Federation
Residence dummiesA dummy equal to one if an individual is in a certain type of residence, and equal to zero otherwise.

These types are homeowner, renter and other (which include for example free stay and illegal occupant).
Urbanization dummiesA dummy equal to one if an individual resides in a specified area, and equal to zero otherwise. The areas are urban, rural and mixed.
Head of household dummyA dummy equal to one if an individual is the head of household, and equal to zero otherwise
Source: Living in BiH Household Panel Survey.
Source: Living in BiH Household Panel Survey.

Department of Economics, New York University, and European Department, IMF respectively. We are grateful to Erwin Tiongson for his generous help on the data set. We thank Andrew Benito, Milan Cuc, Dimitri Demekas, Mark Griffiths, Irena Jankulov, and Graham Slack for their helpful comments. We also thank Tom Walter for editorial support. Any remaining errors are our own.

In this case, an individual has been discouraged if she indicates that the reason for not attempting to borrow is “too expensive,” “believed would be refused,” or “inadequate collateral.”

Other reasons include “do not like to be in debt,” “do not know any lender,” and “other.” It is not clear, for example, whether individuals who have not attempted to borrow because they do not like to be in debt desire positive debt.

We do not use fixed effect estimator because, for binary choice models, fixed effect estimator is inconsistent and biased when t is small (see Hsiao (1996) for analytic results or Katz (2001), for example, for Monte Carlo studies of binary choice estimators).

Heckman selection model can be estimated by a maximum likelihood method or by a two-step estimation using the inverse Mills ratio. The maximum likelihood estimation is more consistent, but it requires a large sample to allow for conversion to a solution. The inverse Mills ratio method is more flexible, and is the one used in this paper. The inverse Mills ratio is λ(z) = f(z)/(1-F(z)) where f is the standard normal probability distribution function and F is the standard normal cumulative distribution function.

Dependent workers are those who are employed by employer. The “inactive” group includes people who are not available in the labor market. Students, retired workers, housewives and the disabled belong to this group.

Other institutions include NGOs, enterprise funds, and other coops.

Del-Rio and Young (2005) also employ individual-level data.

Arvai and Toth (2001) study only the probability of participating in the credit market. Other studies include empirical results for credit participation, credit constraints and desired debt amount.

For example, Crook and Hochguertel (2005) exclude debt from relatives or friends for Italy. However, in BiH, debt from relatives or friends still represents a significant amount. Moreover, the share of consumption debt and mortgages in each country is quite different. Crook and Hochguertel (2005) show that more than 40 percent of households in the Netherlands and the U.S. hold mortgages, while only around 10 percent in Italian households have mortgages. Del-Rio and Young (2005) consider only unsecured debts.

For Hungary, Arvai and Toth (2001) do not include the quadratic term for age

Crook(2001) shows that the relationship is only significant for age-55-and-higher group. Crook and Hochguertel (2005) show that the relationship is significant starting at age 30, but most pronounced in age-65-and-higher group.

For Italy, Crook and Hochguertel (2005) show that the effect is significant for the age-65-and-higher group. Magri (2002) however finds no significant relationship although she cites work by Jappelli (1990) and Fabbri and Padula (2001) that finds a significantly negative relationship

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