Think Twice or Be Wise in Consumer Credit Choices
53 Pages Posted: 14 Jun 2013 Last revised: 22 Aug 2019
Date Written: August 21, 2019
This paper analyzes why consumers use relatively expensive short-term credit. Consumers are heterogeneous in their susceptibility to short-term credit use. Specifically, I find that consumers with low financial literacy and consumers who do not think twice about their decisions use overdraft credit more frequently. The empirical evidence builds on rich household survey data from Germany, where 80% of the population has access to overdraft credit. I confirm the results when controlling for borrowing constraints, and for omitted variables through an IV approach. The 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