How do individuals repay their debt?: the balance-matching heuristic

Gathergood, John, Mahoney, Neale, Stewart, Neil and Weber, Jörg (2018) How do individuals repay their debt?: the balance-matching heuristic. American Economic Review . ISSN 0002-8282 (In Press)

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We study how individuals repay their debt using linked data on multiple credit cards. Repayments are not allocated to the higher interest rate card, which would minimize the cost of borrowing. Moreover, the degree of misallocation is invariant to the economic stakes, which is inconsistent with optimization frictions. Instead, we show that repayments are consistent with a balance-matching heuristic under which the share of repayments on each card is matched to the share of balances on each card. Balance matching captures more than half of the predictable variation in repayments and is highly persistent within individuals over time.

Item Type: Article
Additional Information: Copyright © 2018 AEA
Schools/Departments: University of Nottingham, UK > Faculty of Social Sciences > School of Economics
Depositing User: Eprints, Support
Date Deposited: 11 Sep 2018 10:39
Last Modified: 11 Sep 2018 10:46

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