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The Demand for Credit Cards: Evidence from the Survey of Consumer Finances

Authors

  • Edward Castronova,

    1. Castronova: Associate Professor of Economics, California State University at Fullerton, Fullerton, CA 92834. Phone 1–714–278–4458, Fax 1–714–278–3097, E-mail ecastronova@fullerton.edu
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  • Paul Hagstrom

    1. Hagstrom: Associate Professor of Economics, Hamilton College, Clinton NY 13244. Phone 1–315–859–4146, Fax 1–315 859 4632, E-mail phagstro@hamilton.edu
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    • *

      We thank participants in the session Credit Cards: Equity and Efficiency at the 2001 American Economics Association Annual Meetings for helpful comments on our first draft.


Abstract

We analyze data from the Survey of Consumer Finances estimate the response of credit card demand to standard price and income effects. We model credit card demand as a two-stage process, with consumers obtaining limits in the first stage and then borrowing some fraction of those limits in the second. We estimate this model with a nested tobit procedure. We also treat the demand for limits as one equation in a two-equation supply-demand model. We estimate this model with simple 2SLS, instrumenting for the price variable, the interest rate. The results of the first model suggest that most of the action in the market is in the demand for limits, not the demand for balances. (JEL D1, G0)

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