The Credit Card Debt Puzzle: The Role of Preferences, Credit Access Risk, and Financial Literacy

Gorbachev, Olga; Luengo‐Prado, María José

doi:10.1162/rest_a_00752

Cited by 54 publications

(34 citation statements)

References 17 publications

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“…The share of puzzle households is largest for impatient households with medium levels of risk aversion. These predictions fit the empirical results in Gorbachev and Luengo-Prado (2016) very well.…”

Section: Resultssupporting

confidence: 82%

“…Here, we also include the "corner" group following the approach in Gorbachev and Luengo-Prado (2016). Hereby, our results are also more comparable with theirs.…”

Section: Stylized Factssupporting

confidence: 78%

“…The power of the precautionary borrowing channel is, however, strongest if households are relatively impatient in a growth and uncertainty adjusted sense, are neither too risk neutral nor too risk averse, and are subject to sizable transitory income shocks. Empirical results in Gorbachev and Luengo-Prado (2016) support this characterization of the puzzle group.…”

Section: Resultssupporting

confidence: 54%

See 2 more Smart Citations

Precautionary borrowing and the credit card debt puzzle

Druedahl¹,

Jørgensen²

2018

Quantitative Economics

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This paper addresses the credit card debt puzzle using a generalization of the buffer‐stock consumption model with long‐term revolving debt contracts. Closely resembling actual US credit card law, we assume that card issuers can always deny their cardholders access to new debt, but that they cannot demand immediate repayment of the outstanding balance. Hereby, current debt can potentially soften a household's borrowing constraint in future periods, and thus provides extra liquidity. We show that for some intermediate values of liquid net worth it is indeed optimal for households to simultaneously hold positive gross debt and positive gross assets even though the interest rate on the debt is much higher than the return rate on the assets. Including a risk of being excluded from new borrowing which is positively correlated with unemployment, we are able to simultaneously explain a substantial share of the observed borrower‐saver group and match a broad range of percentiles from the empirical distributions of credit card debt and liquid assets.

show abstract

Section: Resultssupporting

confidence: 82%

“…Here, we also include the "corner" group following the approach in Gorbachev and Luengo-Prado (2016). Hereby, our results are also more comparable with theirs.…”

Section: Stylized Factssupporting

confidence: 78%

Section: Resultssupporting

confidence: 54%

See 1 more Smart Citation

Precautionary borrowing and the credit card debt puzzle

Druedahl¹,

Jørgensen²

2018

Quantitative Economics

View full text Add to dashboard Cite

show abstract

“…First, Gorbachev and Luengo-Prado (2016) use National Longitudinal Survey of the Youth (NLSY) data to conclude-from the observation of variation in individuals in the extent to which they borrow and save simultaneously-that US households vary substantially in time preference. Second, Meier and Sprenger (2017) conclude in favor of discount-rate heterogeneity 6 A much larger literature has used data on consumption and income, and sometimes wealth as well, to estimate models that imply preference heterogeneity more generally.…”

Section: Related Workmentioning

confidence: 99%

The Persistence of Financial Distress

Athreya¹,

Mustre-del-Rio²,

Sánchez³

2017

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Using proprietary panel data, we show that many US consumers experience financial dis-tress (35% when distress is defined by severe delinquency, e.g.) at some point in their lives. However, most distress events are concentrated in a much smaller proportion of consumers in persistent trouble. While only 10% of consumers are distressed for more than a quarter of their lives, fewer than 10% of borrowers account for half of all distress events. These facts can be largely accounted for in a straightforward extension of a workhorse model of defaultable debt with informal default that accommodates a simple form of heterogeneity in time preference, but not otherwise.JEL classification: D60, E21, E44

show abstract

“…First, Gorbachev and Luengo-Prado (2016) use National Longitudinal Survey of the Youth (NLSY) data to conclude-from the observation of variation in individuals in the extent to which they borrow and save simultaneously-that US households vary substantially in time preference. Second, Meier and Sprenger (2017) conclude in favor of discount-rate heterogeneity from data obtained in a field experiment on credit use.…”

Section: Related Workmentioning

confidence: 99%

The Persistence of Financial Distress

Athreya

Mustre-del-Rio

Sánchez

2017

View full text Add to dashboard Cite

Using recently available proprietary panel data, we show that while many (35%) US consumers experience financial distress at some point in the life cycle, most of the events of financial distress are primarily concentrated in a much smaller proportion of consumers in persistent trouble. Roughly 10% of consumers are distressed for more than a quarter of the life cycle, and less than 10% of borrowers account for half of all distress events. These facts can be largely accounted for in a straightforward extension of a workhorse model of defaultable debt that accommodates a simple form of heterogeneity in time preference but not otherwise.JEL classification: D60, E21, E44.

show abstract

The Credit Card Debt Puzzle: The Role of Preferences, Credit Access Risk, and Financial Literacy

Cited by 54 publications

References 17 publications

Precautionary borrowing and the credit card debt puzzle

Precautionary borrowing and the credit card debt puzzle

The Persistence of Financial Distress

The Persistence of Financial Distress

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