Why do financially unconstrained individuals respond to higher credit limits? *

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Sumit Agarwal

National University of Singapore

Shashwat Alok

Indian School of Business (ISB), Hyderabad

Pulak Ghosh

India Institute of Management

Xiaoyu Zhang

Central University of Finance and Economics

Date Written: August 30, 2024

Abstract

This paper uses unique bank-account-level panel data from a leading Indian bank to explain why credit access boosts consumption and reports several novel findings. Consumers spend 9 cents on average for every $1 increase in credit limit despite low ex-ante credit utilization and high liquid savings. Importantly, consumption growth is not financed by borrowing. Rather, the consumption response is increasing in income and liquidity and is higher for individuals with lower labor income uncertainty and consumption uncertainty. Our findings are inconsistent with either currently binding liquidity constraints or precautionary savings motives. Instead, we test the cue theory using a few proxies, and the results support the idea that credit limit hikes serve as cues that trigger consumption.

Keywords: JEL Classification: D14, E21, E51, H31 credit, consumption, credit card, cue theory, financial decision-making, household behavior, liquid buffers, precautionary savings, liquidity constraints, mpc

Suggested Citation

Agarwal, Sumit and Alok, Shashwat and Ghosh, Pulak and zhang, xiaoyu, Why do financially unconstrained individuals respond to higher credit limits? * (August 30, 2024). Available at SSRN: https://ssrn.com/abstract=

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Shashwat Alok

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India
914023187188 (Phone)

Pulak Ghosh

India Institute of Management ( email )

Bannerghatta Road
Bangalore, Karn 560076
Bangalore
India

Xiaoyu Zhang (Contact Author)

Central University of Finance and Economics ( email )

770 Middle Road
Dresden, ME 04342
United States

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