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.