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Sticking to your plan: The role of present bias for credit card paydown

Theresa Kuchler and Michaela Pagel

Journal of Financial Economics, 2021, vol. 139, issue 2, 359-388

Abstract: We use data from an online financial service to show that many consumers fail to stick to their self-set debt paydown plans. This behavior is best explained by present bias. Our empirical approach is informed by a parsimonious model showing that the sensitivity of spending to paycheck receipt reflects a present-biased agents short-run impatience, and that this sensitivity is reduced by available resources only for agents who are aware (sophisticated) of their future impatience. Classifying users accordingly, we find that (i) sophisticated users debt paydown decreases with short-run impatience, and that (ii) planned paydown is most predictive of actual paydown for sophisticated users.

Keywords: Credit card paydown; Present bias; Hyperbolic discounting; Sophistication; Naivete (search for similar items in EconPapers)
JEL-codes: D14 D15 D91 G51 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jfineco.2020.08.002

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Handle: RePEc:eee:jfinec:v:139:y:2021:i:2:p:359-388