Paper #901

Title:

Credit card debt puzzles

Authors:

Michael Haliassos and Michael Reiter

Date:

November 2005

Abstract:

Most US credit card holders revolve high-interest debt, often combined with substantial (i) asset accumulation by retirement, and (ii) low-rate liquid assets. Hyperbolic discounting can resolve only the former puzzle (Laibson et al., 2003). Bertaut and Haliassos (2002) proposed an 'accountant-shopper'framework for the latter. The current paper builds, solves, and simulates a fully-specified accountant-shopper model, to show that this framework can actually generate both types of co-existence, as well as target credit card utilization rates consistent with Gross and Souleles (2002). The benchmark model is compared to setups without self-control problems, with alternative mechanisms, and with impatient but fully rational shoppers.

Keywords:

Credit cards, debt, self control, household portfolios

JEL codes:

E210, G110

Area of Research:

Microeconomics

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