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Determinants of Borrowing Limits on Credit Cards

Author

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  • 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.

Suggested Citation

  • Shubhasis Dey & Gene Mumy, 2005. "Determinants of Borrowing Limits on Credit Cards," Staff Working Papers 05-7, Bank of Canada.
  • Handle: RePEc:bca:bocawp:05-7
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    References listed on IDEAS

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    1. Sydney Ludvigson, 1999. "Consumption And Credit: A Model Of Time-Varying Liquidity Constraints," The Review of Economics and Statistics, MIT Press, pages 434-447.
    2. Calem, Paul S & Mester, Loretta J, 1995. "Consumer Behavior and the Stickiness of Credit-Card Interest Rates," American Economic Review, American Economic Association, pages 1327-1336.
    3. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, pages 61-156.
    4. 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.
    5. 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.
    6. Mester, Loretta J, 1994. "Why Are Credit Card Rates Sticky?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 505-530.
    7. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-1248, September.
    8. 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, Oxford University Press, vol. 117(1), pages 149-185.
    9. Ausubel, Lawrence M, 1991. "The Failure of Competition in the Credit Card Market," American Economic Review, American Economic Association, pages 50-81.
    10. Lucia Dunn & TaeHyung Kim, 1999. "Empirical Investigation of Credit Card Default," Working Papers 99-13, Ohio State University, Department of Economics.
    11. 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.
    12. 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.
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    Cited by:

    1. Jambulapati, Vikram & Stavins, Joanna, 2014. "Credit CARD Act of 2009: What did banks do?," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 21-30.
    2. Shubhasis Dey, 2005. "Lines of Credit and Consumption Smoothing: The Choice between Credit Cards and Home Equity Lines of Credit," Staff Working Papers 05-18, Bank of Canada.
    3. 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.

    More about this item

    Keywords

    Market structure and pricing; Econometric and statistical methods;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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