Debt Revolvers For Self Control
Carol C. Bertaut
Board of Governors of the Federal Reserve System
Goethe University Frankfurt - House of Finance; Goethe University Frankfurt - Faculty of Economics and Business Administration; CEPR; NETSPAR
June 25, 2001
HERMES Center Working Paper 01-11
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.
Number of Pages in PDF File: 39
Keywords: Credit Cards, Consumer Debt, Portfolio Puzzles, Household Portfolios
JEL Classification: G110, E210
Date posted: July 27, 2001
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