Cash-back Rewards, Spending, and Debt Accumulation

Abstract

Using account-level administrative data set from a large U.S. financial institution, we assess the impact on consumption and debt repayment of a credit card incentive program that offers cash-back rewards for usage. Using a generalized difference-in-differences design, we find that the program leads to an increase of 32% in credit card spending and 8% in debt, with such behavior persisting in the long run. Evidence from credit bureau confirms that the higher spending and debt are not driven by cross-card substitution or similar promotions offered by other card issues. Consumers with a higher level of liquidity constraints and financial literacy experienced more pronounced responses. Finally, the findings suggest a deterioration in consumers’ creditworthiness after enrolling in the program.

Keywords: consumption, spending, credit card, behavioral bias, rewards, debt repayment

JEL Classification: D1, D8, G21, G40