The Co-holding Puzzle: New Evidence from Transaction-Level Data

The tendency of consumers to hold low-yield liquid savings while simultaneously holding high-cost unsecured credit on revolving credit lines is a long standing puzzle in economics. Using detailed and highly disaggregated data on spending, income, bank account balances, and consumer credit, we examine the empirical relevance of the competing explanations for such "co-holding". The disaggregated nature of the data allows us to calculate co-holding at daily frequency, enabling us to make a threefold contribution to the literature. First we present new daily measures that reveal that co-holding occurs on approximately 15% of individual x days in our baseline calculations. Most spells of co-holding are also short, lasting less than one calendar month. Second, we evaluate the level of measurement error involved in using traditional, more aggregate, data sources. Finally, we examine the empirical relevance of the competing explanations for co-holding. When brought to the data, we find that co holding appears to be driven by behavioral rather than rational forces. More specifically, we find evidence in support of explanations for co-holding based upon mental accounting and a desire to hold a buffer of liquid savings, while we find rational explanations for co-holding to be empirically much less relevant.