Review of Finance Advance Access originally published online on January 21, 2009
Review of Finance 2009 13(4):657-692; doi:10.1093/rof/rfn033
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Credit Card Debt Puzzles and Debt Revolvers for Self Control*
1 Board of Governors of the Federal Reserve System
2 Goethe University Frankfurt, CFS, MEA, NETSPAR
3 Institute for Advanced Studies, Vienna and CESIfo
Most US credit card holders revolve high-interest debt, often with substantial liquid and retirement assets. We model separation of accounting from shopping allowed by credit cards, in a rational, dynamic game. When the shopper is more impatient than the accountant, selling assets to repay debt is not necessarily optimal, as the shopper can restore debt. Modest relative impatience generates asset-debt co-existence and target utilization rates, matching incidence and median assets of debt revolvers with substantial assets. Empirical evidence is consistent with a role for spending control considerations, after allowing for standard determinants of credit card debt.
JEL Classification: E210, G110
* We are grateful to Giuseppe Bertola, Peter Bossaerts (Editor), Chris Carroll, Tullio Jappelli, Christos Koulovatianos, David Laibson, Nick Souleles, and to an anonymous referee for helpful suggestions. We thank participants in the Economics of Consumer Credit conference at the European University Institute, the AS.S.E.T. conference, and the NBER Summer Institute where very preliminary findings were presented. We acknowledge funding from the European Community's Human Potential Program under contract HPRN-CT-2002-00235, [AGE], the CFS Program on Household Wealth Management, HERMES, the Leventis Foundation, and the Spanish ministry of Science and Technology under grant SEC2002-01601. The views presented in the paper are the authors' own and do not necessarily represent those of the US Federal Reserve System.