Credit Card Debt Puzzles and Debt Revolvers for Self Control

47 Pages Posted: 15 Nov 2008

See all articles by Carol C. Bertaut

Carol C. Bertaut

Board of Governors of the Federal Reserve System

Michael Haliassos

Goethe University Frankfurt - House of Finance; Goethe University Frankfurt - Faculty of Economics and Business Administration; CEPR; NETSPAR

Michael Reiter

Institute for Advanced Studies (IHS)

Multiple version iconThere are 3 versions of this paper

Date Written: September 24, 2008

Abstract

Most US credit card holders revolve high-interest debt, often combined with substantial (i) asset accumulation by retirement, and (ii) low-rate liquid assets. Hyperbolic discounting can resolve the former but not the latter puzzle (Laibson et al., 2003). This paper combines, updates, and extends the theoretical and empirical analysis of the accountant-shopper setup originally presented in Bertaut and Haliassos (2002) and Haliassos and Reiter (2005). It shows that the separation of accounting and shopping made possible by credit cards can generate both types of co-existence and target credit card utilization rates consistent with Gross and Souleles (2002), even when accountant and shopper are engaged in a rational, dynamic game. When the shopper is more impatient than the accountant, it is not necessarily optimal for the accountant to sell assets to pay off debt: the impatient shopper can charge more and restore debt to its previous level. We show that the accountant-shopper setup can match both the observed incidence of debt revolvers with substantial assets and median asset holdings for modest relative impatience. Matching other moments is likely to require heterogeneity in presence and degree of spending control problems among households. We present empirical evidence consistent with a role for spending control considerations, where present, after controlling for standard factors influencing credit card debt.

Keywords: credit cards, debt, self control, household portfolios

JEL Classification: G11, E21

Suggested Citation

Bertaut, Carol C. and Haliassos, Michael and Reiter, Michael, Credit Card Debt Puzzles and Debt Revolvers for Self Control (September 24, 2008). Available at SSRN: https://ssrn.com/abstract=1301784 or http://dx.doi.org/10.2139/ssrn.1301784

Carol C. Bertaut

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Michael Haliassos (Contact Author)

Goethe University Frankfurt - House of Finance

Theodor-W.-Adorno-Platz 3
PF H32
Frankfurt am Main, 60323
Germany

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
PF H32
Frankfurt am Main, D-60323
Germany

CEPR

London
United Kingdom

NETSPAR ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Michael Reiter

Institute for Advanced Studies (IHS) ( email )

Josefstaedter Strasse 39
Vienna, A-1080
Austria

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