How Does Credit Card Payment Affect Subjective Well-being? A Research Based on Samuelson’s Formula for Happiness

Abstract

As a functional financial infrastructure, the credit card system plays a central role in boosting household consumption. Theoretically, a credit card can be used to spend the money of tomorrow on the dream of today, and breaks through liquidity constraints to meet inter-temporal consumption needs for a high-quality life. However, human beings’ desire is always too deep to be filled in. The invisible and painless credit card payment will lead to an illusion of income and expenditures, resulting in over-consumption and further a debt trap against cardholders dominated by the concept of materialistic consumption. Thus, the impact of credit card spending on the economic life of cardholders is by no means neutral. What criteria should we hold to evaluate the non-neutral effect of credit card payment? Is credit card payment a blessing or a curse? How does it happen? These issues are urgent for scientific answers and will definitely have a profound impact on consumers’ decisions about credit card usage, issuing banks’ marketing strategy as well as regulators’ policy formulation. This paper argues that a scientific and feasible way for assessing the welfare effect of credit card payment is to empirically examine the impact of credit card payment on cardholders’ subjective well-being. There are three reasons: firstly, to promote happiness is the ultimate goal of all human beings’ economic activities; the purpose of credit card payment is precisely to maximize happiness through the allocation of financial resources over the cardholders’ life cycle; secondly, credit consumption with a belief of overdraft of the future clearly conflicts with the traditional values of being content and contentment in Chinese society; concern with the ultimate welfare effect of credit cards may help to understand the complex and contradictory motivations and consequences of credit consumption in China, and propose corresponding welfare promotion measures; finally, subjective well-being takes on varied individual heterogeneity, and can be employed to capture the characterization of utility, which meets the requirements for variation of evaluation index. Based on the Samuelson’s formula for happiness, this paper initially illustrates the parallel mechanism and series mechanism through the effect of credit card payment on subjective well-being. On this basis, the conditional mixed process model as well as causal mediation effect analysis is employed to identify the causal effect of credit card payment on subjective well-being using CHFS data in 2011. Taking endogeneity problem into consideration, it is found that the credit card payment significantly reduces the subjective well-being of cardholders, which is referred to erosion effect. A causal mediation effect analysis suggests that series mechanism rather than parallel mechanism works. In detail, credit card payment causes a reduction in subjective well-being by 0.033 on average, which is carried out and explained by the series mechanism combing both material consumption channel and desire expansion channel. The erosion effect of credit card payment on subjective well-being is established in a number of robustness tests accounting for more control variables and sample selection bias, but it varies with motivation, family status, household registration and regions. Specifically, the erosion effect is significant both in revolvers and central region group, and the erosion effect on rural residents and common family members is stronger than that on urban residents and family heads respectively. Conclusions and suggestions have warning and inspiring implications for cardholders, issuing banks as well as regulators. Cardholders must correct their attitudes and motivation towards credit card usage, and issuing banks should fulfill their prudent obligations on credit, while regulatory agencies shall promote the development of multi-level consumer finance. Compared with existing literature, the differences and contributions of this paper are manifested in three aspects: first of all, as far as research questions concerned, this paper penetrates the confine of intermediate goal that the existing research is limited to, and further theoretically and empirically investigates the causal effect of credit card payment on ultimate goal; secondly, in the aspect of research methods, this paper employs the causal mediation effect analysis to identify parallel and serial mechanisms, which improves our understanding of the welfare effect of credit card usage; finally, this paper fully considers the potential endogeneity of credit card payment decisions, and effectively ensure the credibility and robustness of results.