An essay on the economics of consumer debt

In the last two decades, data on U.S. household portfolio on debt and asset holdings showed a puzzling mix of high interest rate bankcard debt and liquid assets. In this dissertation, I examine the basic implication of the portfolio features commonly attributed to growing consumer irrationality. I posit this appearance is a manifestation of precautionary savings, substitution to cheaper home equity loans, and technical change in the electronic processing of payments.;This dissertation has two arguments. First, all households behave as predicted by the precautionary savings consumption model where prudent households and liquidity-constrained households hold a small savings as precautionary or buffer stock to insure against negative shocks, a fact well documented by macroeconomic studies. Second, technological innovation on credit scoring and processing has altered the accessibility to the credit market to previously liquidity-constrained households, increasing the proportion of households who become bankcard debtors, thus augmenting the effect of bankcard debt substitution to cheaper home equity loans. In contrast to behavioral explanations focusing on issues such as mental accounting and self-control, or bankruptcy or default models, this dissertation proposes an empirical model based on classical utility and preferences to provide evidence in support of household holdings of savings and bankcard debt that might have originated the irrationality implication found other household portfolio studies.;Using maximum likelihood Heckman sample selection regression, I test the implications of precautionary savings and the liquidity constraint using the traditional approach with constant relative risk aversion and preferences. Four years of data from the Survey of Consumer Finance are used to test the empirical model, and households are censored according to whether they hold bankcard debt. Examination of data weakly supports the technological shift argument; however, regression results provide strong evidence in support of liquidity constrained and unconstrained households behavior as predicted by the empirical model based on risk averse and precautionary savings models under negative shock.