Think Twice or Be Wise in Consumer Credit Choices
53 Pages Posted: 14 Jun 2013 Last revised: 22 May 2019
Date Written: May 20, 2019
We analyze what drives consumers to use relatively expensive short-term credit. We find heterogeneity in the susceptibility to short-term credit use. Specifically, we find that consumers with low financial literacy and consumers who do not think twice about their decisions use overdraft credit more frequently. Our empirical analysis draws on rich household survey data from Germany, where 80% of the population has access to overdraft credit. We confirm our results when controlling for borrowing constraints, and for omitted variables through an IV approach. Our evidence on borrower characteristics can help to inform evaluations of existing policies and targeting new policies.
Keywords: Household finance, cognitive reflection, financial literacy, expert intuition
JEL Classification: D12, D14
Suggested Citation: Suggested Citation