Determinants of Borrowing Limits on Credit Cards

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The difference between actual borrowings and borrowing limits alone generates information asymmetry in the credit card market. This information asymmetry can make the market incomplete and create ex post misallocations. Households that are denied credit could well turn out to be ex post less risky than some credit card holders who borrow large portions of their borrowing limits. Using data from the U.S. Survey of Consumer Finances, the authors find a positive relationship between borrower quality and borrowing limits, controlling for banks' selection of credit card holders and the endogeneity of interest rates. Their estimation reveals how interest rates have a negative influence on the optimal borrowing limits offered by banks.