An analysis of consumer demand for credit in a portfolio context

Hyuncha Choe, Purdue University

Abstract

In connection with the current increase in household credit use, numerous studies have tried to explain the growth of household credit. While previous studies of consumer demand for assets in a portfolio context showed that the consumer demand for different types of assets was interrelated and the status of credit in the portfolio also affected the demand for assets, the interrelationship among the demand for different types of credit had not been investigated completely. Therefore the primary purpose of this study was to investigate the consumer demand for mortgage credit, consumer installment credit, non-installment credit, and revolving credit card debt in the consumer portfolio context in order to examine the interrelationship among the demand for those types of credit. In addition, the effects of disequilibria of asset components in the portfolio and household characteristics on the consumer demand for different types of credit were also estimated. On the basis of intertemporal utility maximization theory and stock-adjustment hypothesis, a multivariate stock-adjustment credit demand model, which included own- and cross-adjustment effects of credit and cross-adjustment effects of assets, as well as short-run effects of household characteristics, was formulated. With weighted four-year panel data from 1983 and 1986 Surveys of Consumer Finances, the empirical model was estimated using a two-stage estimation method for tobit model. The results supported the hypotheses that, in general, the consumer demand for a certain type of credit was related to the consumer demand for other types of credit and asset components in the portfolio as well as the characteristics of the household. The consumer demand for mortgage credit, installment credit, and revolving credit card debt depended not only the disequilibrium of itself but also on the disequilibria of the other types of credit and asset components in the portfolio. The consumer demand for non-installment credit was related not to the disequilibria of itself and other types of credit but to the disequilibria of asset components in the portfolio. All household characteristic variables had significant effects on more than one credit equation. The findings of this study suggested that a multivariate stock-adjustment model was an appropriate model to explain the consumer's credit demand behavior adequately.

Degree

Ph.D.

Advisors

Widdows, Purdue University.

Subject Area

Home economics|Banking|Finance

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