Title: Why use debit instead of credit?
Description: "Debit cards are overtaking credit cards as the most prevalent form of electronic payment at the point of sale, yet the determinants of a ubiquitous consumer choice--"debit or credit?"--have received relatively little scrutiny.  Several stylized facts suggest that debit-card use is driven by behavioral factors.  The popular view is that debit-card use presents a puzzle for canonical economic models.  However, we should not overlook standard cost-based motives for using debit cards.  Principally, the 50 percent of debit-card users who revolve credit-card balances would pay interest to charge purchases on the margin and hence might rationally choose to use debit rather than credit to minimize transaction costs.  Debit-card use might also be rational for consumers lacking access to a credit card or facing a binding credit limit.  I document robust effects of these types of credit-card use on debit use and show that such effects are consistent with a canonical model of consumer choice.  This paper also shows, however, that it is difficult to distinguish sharply between canonical and behavioral motives for debit-card use in publicly available data.  More generally, I develop analytical frameworks for testing competing canonical and behavioral models and find evidence consistent with important roles for both pecuniary and psychological motives"--Federal Reserve Bank of New York web site.
Subjects: Consumer behavior, Credit cards, Debit cards, Mathematical models
Places: United States