Consumer choices with wealth preferences and separation of consumption and payment

St Aubyn, Carolyn (2022) Consumer choices with wealth preferences and separation of consumption and payment. Working Paper. Birkbeck Centre for Applied Macroeconomics, London, UK.

Abstract

This paper presents a consumer choice model in which both consumption and wealth are valued. The assumption on wealth can help explain observed costly consumer choices such as paying charges for late settlement of bills, and credit card debt costs. The paper addresses one such costly choice puzzle - the credit card debt, or co-holding, puzzle where cash and credit card debt are simultaneously held. An empirical analysis gives a new perspective on the extent of this puzzle and the model shows, theoretically, how including preferences for wealth can help explain the co-holding by individuals with very high levels of liquidity whose behaviour is thus hard to explain with existing theories for co-holding. The model also has implications for optimal demand levels in payment set-ups where payment is delayed, such as such as the rapidly growing Buy Now, Pay Later financing.

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