American Economic Review Vol. 109 No. 3 2019

How Do Individuals Repay Their Debt? The Balance-Matching Heuristic

John Gathergood¹; Neale Mahoney²; Neil Stewart³; Jörg Weber¹

¹ School of Economics, University of Nottingham, Sir Clive Granger Building, University Park, Nottingham, NG7 2RD United Kingdom (email: ) · ² University of Chicago Booth School of Business, 5807 South Woodlawn Avenue, Chicago, IL 60637 (email: ) · ³ Warwick Business School, University of Warwick, Coventry, CV4 7AL United Kingdom (email: )

Abstract

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.

DOI

10.1257/aer.20180288

Volume

109

Issue

3

Pages

844-875

Language

en

Sources

openalex crossref

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓