I Will Pay Tomorrow, Or Maybe the Day After...

35 Pages Posted: 22 Feb 2014

See all articles by Gustavo A. Barboza

Gustavo A. Barboza

Clarion University - College of Business Administration

Date Written: February 21, 2014

Abstract

Procrastinating repayment in full on credit card debt is a problem affecting a large segment of the population. This paper studies the role that present-biased preferences and impatience play in the repayment behavior of consumers. Evidence from a field study provides empirical support to the hypothesis that individuals with present-biased preferences tend to adopt a strategic procrastination repayment behavior that is not optimal to accomplish repayment in full. More specifically, individuals suffering from self control issues and using credit cards to bridge unexpected shortage of income are more likely to fail to repay credit cards in full in the period after the purchase was completed, therefore carrying over a month-to-month balance. In addition, people with a simple present-biased revealed effect are also more likely to fall behind on credit card repayment, vis-à-vis those that have a higher marginal propensity to save. By the same token, we find that individuals consistently behave inconsistently, that is evidence from our sample indicates the predominance of dynamically inconsistent preferences, in opposition to the prescriptions of the neoclassical theory. In this regard, naïve type of individuals with present-biased preferences consume beyond their income capabilities and are much more likely to carry over credit card debt into the next period, vis-à-vis individuals that are more sophisticated.

Keywords: Present-biased preferences, procrastination, credit card borrowing

JEL Classification: D12, D14, D91

Suggested Citation

Barboza, Gustavo A., I Will Pay Tomorrow, Or Maybe the Day After... (February 21, 2014). Available at SSRN: https://ssrn.com/abstract=2399528 or http://dx.doi.org/10.2139/ssrn.2399528

Gustavo A. Barboza (Contact Author)

Clarion University - College of Business Administration ( email )

305 Still Hall
Clarion, PA 16214
United States

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