Commitment and Borrower Heterogeneity: Evidence from Revolving Consumer Credit
43 Pages Posted: 28 May 2019 Last revised: 22 Dec 2019
Date Written: December 1, 2019
Based on a unique dataset provided by a retail bank, we analyze borrower heterogeneity in the debt response to interest rate decreases and credit limit increases in revolving consumer credit. Our key findings show that 1) the debt response of borrowers who commit to monthly minimum repayments is about four times as large as the response of uncommitted borrowers when interest rates decrease, 2) committed borrowers demand credit limit increases which are more than twice as high as those of uncommitted borrowers following interest rate cuts, and 3) committed borrowers’ marginal propensity to consume out of credit limit increases is almost 30% stronger. These results are most likely to be caused by sophisticated impatient individuals choosing to commit and shed new light on the role of non-standard borrower preferences in consumer credit.
Keywords: Financial Intermediation, Behavioral Finance, Household Finance, Consumer Credit
JEL Classification: D12, D14, D91, G21
Suggested Citation: Suggested Citation