July 23, 2014, by Suzanne

The puzzle of high cost credit versus low yield savings

A new publication by John Gathergood and Jörg Weber entitled ‘Self-Control, Financial Literacy & the Co-Holding Puzzle’ is forthcoming in the  Journal of Economic Behavior & Organization  In advance of publication, the paper is available online.

Using UK survey data to analyze the puzzling co-existence of high cost revolving consumer credit alongside low yield liquid savings in household balance sheets, which they name the ‘co-holding puzzle’,  they discover that approximately 12% of households in their sample co-hold, on average, £3800 of revolving consumer credit on which they incur interest charges, even though they could immediately pay down all this debt using their liquid assets. Co-holders are typically more financially literate, with above average income and education. In most estimates co-holding is also associated with impulsive spending behavior on the part of the household. Results provide empirical support to theoretical models in which households co-hold as a means of managing self-control problems.

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