Debt Revolvers For Self Control

HERMES Center Working Paper 01-11

39 Pages Posted: 27 Jul 2001  

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

Date Written: June 25, 2001

Abstract

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.

Keywords: Credit Cards, Consumer Debt, Portfolio Puzzles, Household Portfolios

JEL Classification: G110, E210

Suggested Citation

Bertaut, Carol C. and Haliassos, Michael, Debt Revolvers For Self Control (June 25, 2001). HERMES Center Working Paper 01-11. Available at SSRN: https://ssrn.com/abstract=276052 or http://dx.doi.org/10.2139/ssrn.276052

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

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

NETSPAR ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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