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Essays on consumer lines of credit: credit cards and home equity lines of credit

Dey, Shubhasis
http://rave.ohiolink.edu/etdc/view?acc_num=osu1091811947

Abstract Details

2004, Doctor of Philosophy, Ohio State University, Economics.
Lines of credit in the consumer credit market are primarily in the forms of credit cards (CCs) and Home Equity Lines of Credit (HELOCs). In the first chapter of the dissertation I focus on the special usage of lines of credit as a hedge against optimally uninsured risks. This framework helps me understand why some consumers hold lines of credit and do not draw on them. Consumers weigh the various non-interest costs of HELOC borrowing against the benefits of low and income tax-deductible interest rates. I show that consumers optimally choose CCs as the preferred risk-financing instrument for sufficiently small amounts of debt. For relatively large amounts of indebtedness, they prefer to use HELOCs exclusively; and for extremely large borrowing needs, the costs of collateralization of credit induce consumers to carry debt on both CCs and HELOCs. The motive to consolidate debt introduces simultaneity in consumers’ choice of holding debt on lines of credit, which is addressed with an appropriate econometric model. In the second chapter of the dissertation I examine the nature of the information asymmetry prevalent between borrowers and lenders in the market for HELOCs and test how collateral helps overcome this asymmetric information. Two distinct paradigms have emerged from the theoretical studies investigating the role of collateral in explaining the risk-spread in the market for collateralized loans. The sorting-by-observed-risk paradigm predicts a positive association between collateral and borrower risk and hence a positive relationship between the amount of collateral pledged and the rate of interest charged. The sorting-by-private-information paradigm, on the other hand, postulates a negative relationship between collateral and credit price. I find empirical support for the sorting-by-private-information paradigm in the market for HELOCs. In the final chapter of the dissertation I theoretically and empirically identify the determinants of credit card borrowing limits when banks can simultaneously choose the borrowing limit and the interest rate in their loan contracts. I find a positive relationship between borrower quality and the borrowing limit on CCs, correcting for banks’ selection of credit card holders and for the influence of the endogenous variable, the credit card interest rate.
Lucia Dunn (Advisor)
107 p.
Economics, Finance
Lines of Credit; Credit Cards; Home Equity Lines of Credit; Debt Consolidation

Recommended Citations

Citations

  • Dey, S. (2004). Essays on consumer lines of credit: credit cards and home equity lines of credit [Doctoral dissertation, Ohio State University]. OhioLINK Electronic Theses and Dissertations Center. http://rave.ohiolink.edu/etdc/view?acc_num=osu1091811947

    APA Style (7th edition)

  • Dey, Shubhasis. Essays on consumer lines of credit: credit cards and home equity lines of credit. 2004. Ohio State University, Doctoral dissertation. OhioLINK Electronic Theses and Dissertations Center, http://rave.ohiolink.edu/etdc/view?acc_num=osu1091811947.

    MLA Style (8th edition)

  • Dey, Shubhasis. "Essays on consumer lines of credit: credit cards and home equity lines of credit." Doctoral dissertation, Ohio State University, 2004. http://rave.ohiolink.edu/etdc/view?acc_num=osu1091811947

    Chicago Manual of Style (17th edition)

osu1091811947
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This open access ETD is published by The Ohio State University and OhioLINK.