Working Papers


R&R at the Review of Economics and Statistics

I study how intra-household frictions and anchoring contribute to the credit card debt puzzle, the co-holding of high-cost debt and low-yield liquid assets. First, I find couples co-hold 42 percent more as units than as individuals relative to income. Moreover, in a natural experiment, couples do not cooperate to reduce high-cost debt, suggesting that intra-household frictions contribute to co-holding. Second, I find individuals who regularly make credit card debt payments equal to or near the minimum account for 59 percent of individual co-holding. The evidence suggests anchoring to the minimum payment contributes to co-holding via these low payments.

This paper documents extensive commitment to mandatory debt repayment. In a natural experiment in which households can apply for free mortgage-payment flexibility for one to twelve months, 43 percent of applicants choose a dominated option of short flexibility. I argue that short flexibility fulfills a desire for partial commitment due to self-control problems because (i) applying for short flexibility correlates with other commitment strategies to increase savings and (ii) consumption drops discontinuously at the predictable end of flexibility. This desire for commitment can reduce the potency of debt-forbearance offers in recessions and contribute to asset illiquidity.

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