Learning in the Limit: Income Inference from Credit Extensions

Abstract

Combining a randomized controlled trial with administrative and survey data, this paper shows that credit limit extensions significantly increase total spending and income expectations. By controlling for changes in personal income expectations, the spending response to credit limit extensions weakens by approximately 30%. For financially unconstrained consumers, expectation changes account for around two-thirds of the spending responses to limit extensions. These findings are consistent with consumers inferring future income from credit supply.