Rational but Not Prescient: Borrowing during the Fracking Boom
Abstract: To study how income expectations affect borrowing, we use leased natural gas rights in Texas in the mid-2000s, which created potential for future leaseholder income without loosening credit constraints. In matching 11,000 leaseholders with non-leaseholders selected from a screened pool of 5.2 million, we find that the average leaseholder borrowed $13,000 more over the 2003–08 leasing boom. A consumption-smoothing model indicates that leaseholders’ income expectations aligned with forecasts of persistently high natural gas prices. Yet, the unforeseeable success of fracking was associated with reduced prices and increased bankruptcies during 2009–19 for non-prime leaseholders as well as fracking firms.
File format is application/pdf
Description: Full text
Provider: Federal Reserve Bank of Kansas City
Part of Series: Research Working Paper
Publication Date: 2022-05-23
Number: RWP 2022-05