Optimism, Debt Accumulation, and Business Growth

Using Indonesian Family Life Survey data (2007, 2014), we investigate the role of optimism in the dynamics of debt and business growth in Indonesia. In our model, optimism is formed by aspirations and perceived influence of random factors outside the decision maker's control. Our results show that the optimism level, measured by the difference between an individual's current subjective wellbeing and her expected level of wellbeing in five years, is positively correlated with debt growth in farm business households. Furthermore, debt growth in farm households appears to increase the future reference point and the optimism level without sufficient profit growth, which in turn leads to even higher debt accumulations in farm business households. In contrast, nonfarm household heads with a higher level of optimism are more likely to effectively leverage debt toward income-generating activities. The findings of this study suggest that optimistic investment may result in a debt trap in an environment where random external factors play a bigger role in the formation of optimism.