TY  - JOUR
AU  - Laibson,David
AU  - Repetto,Andrea
AU  - Tobacman,Jeremy
TI  - A Debt Puzzle
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7879
PY  - 2000
Y2  - September 2000
UR  - http://www.nber.org/papers/w7879
L1  - http://www.nber.org/papers/w7879.pdf
N1  - Author contact info:
David Laibson
Department of Economics
Littauer M-12
Harvard University
Cambridge, MA 02138
Tel: 617/496-3402
Fax: 617/495-8570
E-Mail: dlaibson@gmail.com

Andrea Repetto
University of Chile
E-Mail: no email available

Jeremy Tobacman
Business and Public Policy Department
1459 Steinberg Hall-Dietrich Hall
3620 Locust Walk
The Wharton School
University of Pennsylvania
Philadelphia, PA 19104-6372
Tel: 215/898-9450
Fax: 215/898-7635
E-Mail: tobacman@wharton.upenn.edu
AB  - Over 60% of US households with credit cards are currently borrowing -- i.e., paying interest -- on those cards.  We attempt to reconcile the high rate of credit card borrowing with observed levels of life cycle wealth accumulation.  We simulate a lifecycle model with five properties that create demand for credit card borrowing.  First, the calibrated labor income path slopes upward early in life.  Second, income has transitory shocks.  Third, consumers invest actively in an illiquid asset, which is sufficiently illiquid that it can not be used to smooth transitory income shocks.  Fourth, consumers may declare bankruptcy, reducing the effective cost of credit card borrowing. Fifth, households have relatively more dependents early in the life-cycle.  Our calibrated model predicts that 20% of the population will borrow on their credit card at any point in time, far less than the observed rate of over 60%.  We identify a resolution to this puzzle: hyperbolic time preferences. Simulated hyperbolic consumers borrow actively in the revolving credit card market and accumulate relatively large stocks of illiquid wealth, matching observed data.
ER  -