| The Permanent-Income and Lifecycle Hypothesis, which prescribes the household saving and consumption behavior in a simplified life scenario, was challenged by later researchers with more assumptions. One of these assumptions is the factor of liquidity constraints, or as appeared in this dissertation, credit constraints. Credit constraints refer to the borrowing ceiling a household could obtain from a lender. Banking credit supply theory asserts that the imposition of credit constraints is due to the adverse selection and moral hazard. This dissertation intended to analyze the household debt level of the United States by using the debt service burden measure, which represents the relative portion of debt repayments to household income. Guidelines on the service burden were discussed with the variation in the component of the ratio calculation. Differences in the threshold choices were also noted across personal finance educators, practitioners and the lending industry. According to selective guidelines, the household debt service burden was categorized into zero, low, moderate and high tiers. The data source came from the 1998 Survey of Consumer Finances, a nationwide survey sponsored by the Federal Reserve Board. Ordinal logit analysis was conducted to model the probability of a household falling into a higher versus a lower burden tier under the PI-LCH framework, accounting for credit constraints. Models were fitted individually on consumer debt service burden and total debt service burden. The findings revealed that credit-constrained families were more likely to be in a higher burden tier. Ceteris paribus, households headed by a college attendee, married couples, working individuals, those with mortgage payments, lower income households, those with a low liquidity ratio, and households holding many credit cards had a larger probability to be highly burdened. However, variables such as the head's age and expectation proxy were not found significantly predictive. The life cycle model implies that the expectation of income growth should have an effect on a consumer's demand for credit, so the lack of an effect of that variable is particularly surprising. Credit-constrained families may have to pay higher interest rates, which leads to a larger repayment burden compared to their non-constrained counterparts. |
