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| Title: | | Why use debit instead of credit? Consumer choice in a trillion-dollar market  |
| Authors: | | Zinman, Jonathan |
| Issue Date: | | 2004 |
| Series/Report no.: | | Staff Report, Federal Reserve Bank of New York 191 |
| Abstract: | | 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. |
| JEL: | | D14 D91 E41 G29 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Staff Reports, Federal Reserve Bank of New York
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