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Debt Revolvers for Self Control

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Author Info
Carol C. Bertaut
Michael Haliassos

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Abstract

By 1998, about two-thirds of U.S. households held a bank-type credit card. Despite high interest rates, most revolve credit card debt. The majority of debt revolvers have substantial liquid assets, apparently violating arbitrage. We propose an "accountant-shopper" model that could provide an explanation for this puzzle. In our model, the "accountant self" (or spouse) of the household can control the expenditures of the "shopper self" (or spouse) by limiting the purchases the shopper can make before encountering the credit limit. Since the card balance is used for control purposes, the accountant self may also find it optimal to save in lower-return riskless assets. Using attitudinal responses and demographic data from the pooled 1995 and 1998 Surveys of Consumer Finances, we estimate a bivariate probit model of the decisions to have a credit card and to revolve debt on it, allowing for sample selection. The pattern of estimated coefficients is consistent with debt revolvers being motivated primarily by self-control considerations rather than intertemporal consumption smoothing.

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File URL: http://papers.econ.ucy.ac.cy/RePEc/papers/0208.pdf
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Publisher Info
Paper provided by University of Cyprus Department of Economics in its series University of Cyprus Working Papers in Economics with number 0208.

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Length: 44 pages
Date of creation: May 2001
Date of revision:
Handle: RePEc:ucy:cypeua:0208

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Web page: http://www.econ.ucy.ac.cy

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Related research
Keywords: credit cards; consumer debt; portfolio puzzles; household portfolios;

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. David B. Gross & Nicholas S. Souleles, 2001. "Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data," NBER Working Papers 8314, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Shefrin, Hersh M & Thaler, Richard H, 1988. "The Behavioral Life-Cycle Hypothesis," Economic Inquiry, Oxford University Press, vol. 26(4), pages 609-43, October.
  3. 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.
  4. Luigi Guiso & Tullio Jappelli, 2000. "Household Portfolios in Italy," CSEF Working Papers 43, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
    Other versions:
  5. 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. [Downloadable!] (restricted)
  6. Thomas A. Durkin, 2002. "Consumers and credit disclosures: credit cards and credit insurance," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Apr, pages 201-213. [Downloadable!]
  7. David Laibson & Andrea Repetto & Jeremy Tobacman, 2000. "A Debt Puzzle," Documentos de Trabajo 80, Centro de Economía Aplicada, Universidad de Chile. [Downloadable!]
    Other versions:
    • David Laibson & Andrea Repetto & Jeremy Tobacman, 2000. "A Debt Puzzle," NBER Working Papers 7879, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Sydney Ludvigson, 1999. "Consumption And Credit: A Model Of Time-Varying Liquidity Constraints," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 434-447, August. [Downloadable!] (restricted)
    Other versions:
  9. Thomas A. Durkin, 2000. "Credit cards: use and consumer attitudes, 1970-2000," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Sep, pages 623-634. [Downloadable!]
  10. Haliassos, Michael & Bertaut, Carol C, 1995. "Why Do So Few Hold Stocks?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1110-29, September. [Downloadable!] (restricted)
  11. Hoch, Stephen J & Loewenstein, George F, 1991. " Time-Inconsistent Preferences and Consumer Self-Control," Journal of Consumer Research: An Interdisciplinary Quarterly, University of Chicago Press, vol. 17(4), pages 492-507, March.
  12. Thaler, Richard H & Shefrin, H M, 1981. "An Economic Theory of Self-Control," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 392-406, April. [Downloadable!] (restricted)
    Other versions:
  13. Carol Bertaut & Martha Starr-McCluer, 2000. "Household portfolios in the United States," Finance and Economics Discussion Series 2000-26, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sumit Agarwal & Souphala Chomsisengphet & Chunlin Liu & Nicholas S. Souleles, 2006. "Do consumers choose the right credit contracts?," Working Paper Series WP-06-11, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
  2. David Laibson & Andrea Repetto & Jeremy Tobacman, 2007. "Estimating Discount Functions with Consumption Choices over the Lifecycle," NBER Working Papers 13314, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Irina A. Telyukova & Randall Wright, 2007. "A model of money and credit, with application to the credit card debt puzzle," Working Paper 0711, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  4. Rob Alessie & Stefan Hochguertel & Arthur van Soest, 2002. "Non-take-up of Tax-favored Savings Plans: Are Household Portfolios Optimal?," Tinbergen Institute Discussion Papers 01-122/3, Tinbergen Institute. [Downloadable!]
    Other versions:
  5. Michael Haliassos & Christis Hassapis & Alex Karagrigoriou & George Kyriacou & Michalis C. Michael & George Syrichas, 2003. "Debts of Cyprus Households: Lessons from the First Cyprus Survey of Consumer Finances," Working Papers 0305, Central Bank of Cyprus. [Downloadable!]
    Other versions:
  6. Dean S. Karlan, 2005. "Using Experimental Economics to Measure Social Capital And Predict Financial Decisions," Working Papers 909, Economic Growth Center, Yale University. [Downloadable!]
    Other versions:
  7. Telyukova, Irina A., 2009. "Household Need for Liquidity and the Credit Card Debt Puzzle," MPRA Paper 6674, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  8. Irina Grafova, 2007. "Your Money or Your Life: Managing Health, Managing Money," Journal of Family and Economic Issues, Springer, vol. 28(2), pages 285-303, June. [Downloadable!] (restricted)
  9. Stephan Meier & Charles Sprenger, 2007. "Impatience and credit behavior: evidence from a field experiment," Working Papers 07-3, Federal Reserve Bank of Boston. [Downloadable!]
  10. Jonathan Zinman, 2005. "Debit or credit?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston. [Downloadable!]
  11. Jonathan Zinman, 2004. "Why use debit instead of credit? Consumer choice in a trillion-dollar market," Staff Reports 191, Federal Reserve Bank of New York. [Downloadable!]
  12. Dean S. Karlan, 2004. "Using Experimental Economics to Measure Social Capital and Predict Financial Decisions," Artefactual Field Experiments 0062, The Field Experiments Website. [Downloadable!]
  13. Andrew Ching & Fumiko Hayashi, 2006. "Payment card rewards programs and consumer payment choice," Payments System Research Working Paper PSR WP 06-02, Federal Reserve Bank of Kansas City. [Downloadable!]
    Other versions:
  14. Jaime Ruiz-Tagle, 2006. "Financial Markets Incompleteness and Inequality Over the Life-Cycle," Working Papers Central Bank of Chile 405, Central Bank of Chile. [Downloadable!]
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This page was last updated on 2009-11-20.

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