Modeling Credit Card Borrowing: A Comparison of Type I and Type II Tobit Approaches

This study focuses on credit cards as a borrowing medium using 1998 Survey of Consumer Finance data. The type II Tobit approach used here overcomes a shortcoming of the conventional type I Tobit model, which restricts the coefficients of the binary borrowing decision (the first step) and balance level decision (the second step) to have the same sign. By separately estimating the first and second steps as reduced-form functions in which the overall effects of supply and demand are incorporated, the type II Tobit procedure yields more consistent results with other studies and quantifies the marginal effect (elasticity) of a particular determinant for practical uses.