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Determinants of Borrowing Limits on Credit Cards

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Author Info

  • Shubhasis Dey
  • Gene Mumy

Abstract

The difference between actual borrowings and borrowing limits alone generates information asymmetry in the credit card market. This information asymmetry can make the market incomplete and create ex post misallocations. Households that are denied credit could well turn out to be ex post less risky than some credit card holders who borrow large portions of their borrowing limits. Using data from the U.S. Survey of Consumer Finances , the authors find a positive relationship between borrower quality and borrowing limits, controlling for banks' selection of credit card holders and the endogeneity of interest rates. Their estimation reveals how interest rates have a negative influence on the optimal borrowing limits offered by banks.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 05-7.

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Length: 32 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:bca:bocawp:05-7

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Keywords: Market structure and pricing; Econometric and statistical methods;

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References

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  1. Loretta J. Mester, 1993. "Why are credit card rates sticky?," Working Papers 93-16, Federal Reserve Bank of Philadelphia.
  2. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  3. Brito, Dagobert L & Hartley, Peter R, 1995. "Consumer Rationality and Credit Cards," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 400-433, April.
  4. Sydney Ludvigson, 1996. "Consumption and credit: a model of time-varying liquidity constraints," Research Paper 9624, Federal Reserve Bank of New York.
  5. Edward Castronova & Paul Hagstrom, 2004. "The Demand for Credit Cards: Evidence from the Survey of Consumer Finances," Economic Inquiry, Western Economic Association International, vol. 42(2), pages 304-318, April.
  6. David B. Gross & Nicholas S. Souleles, 2002. "Do Liquidity Constraints And Interest Rates Matter For Consumer Behavior? Evidence From Credit Card Data," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 149-185, February.
  7. Paul S. Calem & Loretta J. Mester, 1994. "Consumer Behavior and the Stickiness of Credit Card Interest Rates," Center for Financial Institutions Working Papers 94-14, Wharton School Center for Financial Institutions, University of Pennsylvania.
  8. Ausubel, Lawrence M, 1991. "The Failure of Competition in the Credit Card Market," American Economic Review, American Economic Association, vol. 81(1), pages 50-81, March.
  9. Sangkyun Park, 1997. "Option value of credit lines as an explanation of high credit card rates," Research Paper 9702, Federal Reserve Bank of New York.
  10. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
  11. Lee, Lung-fei & Maddala, G S & Trost, R P, 1980. "Asymptotic Covariance Matrices of Two-Stage Probit and Two-Stage Tobit Methods for Simultaneous Equations Models with Selectivity," Econometrica, Econometric Society, vol. 48(2), pages 491-503, March.
  12. Lucia Dunn & TaeHyung Kim, 1999. "Empirical Investigation of Credit Card Default," Working Papers 99-13, Ohio State University, Department of Economics.
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Cited by:
  1. Shubhasis Dey, 2005. "Lines of Credit and Consumption Smoothing: The Choice between Credit Cards and Home Equity Lines of Credit," Working Papers 05-18, Bank of Canada.
  2. Berg, Nathan & Kim, Jeong-Yoo, 2010. "Demand for Self Control: A model of Consumer Response to Programs and Products that Moderate Consumption," MPRA Paper 26593, University Library of Munich, Germany.

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