Golden Eggs versus Plastic Eggs: Hyperbolic Preferences and the Persistence of Debit

Document Type

Article

Publication Date

1-2011

Publication Title

Journal of Economics and Finance

DOI

10.1007/s12197-009-9107-1

Abstract

The popularity of debit cards is good news from a social perspective since they carry a lower transaction cost than other non-cash payment methods. Unfortunately, the reason for this consumer driven growth remains a mystery. Consumers do not benefit from any of the gains created by the low transaction costs. Rather, the incentives being offered to consumers encourage them to use credit cards despite higher transaction costs. We demonstrate that consumers may be using debit cards as a means of budgetary precommitment when preferences are hyperbolic. Using data from the 2004 Survey of Consumer Finances, we find that consumers substitute debit use for investment in illiquid assets as a method of self constraint as incomes fall.

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