Consumer Behavior and the Stickiness of Credit-Card Interest Rates
AbstractDuring several episodes of declining or rising interest rate changes in the 1980s and 1990s, credit card rates changed little. At the same time, credit cards consistently earned higher returns than most other bank products. Ausenbel (1991) argues the reason is that the industry deviates from a perfectly competitive model because consumers do not conform to the behavioral assumptions of perfect competition. Using data from the Federal Reserve's 1989 Survey of Consumer Finances, the authors provide specific evidence about consumer behavior. The analysis suggests that the three factors cited by Ausenbel - search costs, switch costs, and adverse selection problems for individual firms who change rates - has contributed to the observed performances in the credit market. The paper advances two theoretical arguments supporting the contention that credit card issuers face adverse selection problems. The authors find that credit card indebtedness is universally related to an individual's pro-pensity to comparison shop for terms. Consumers with substantial search costs tend to have big balances. Card issuers face an adverse selection problem induced by search costs. The authors find no evidence consumers underestimate their propensity to borrow. The authors find that households with larger balances are more likely to have experienced payment problems. These findings are evidence of adverse selection induced by switch costs. Thus, the authors' empirical findings support the view that competition in the credit card market is imperfect. These findings confirm bankers' arguments that credit card rates are sticky because consumers are not responsive to rate cuts. The authors' findings cast doubt on the efficacy of Fair Credit Disclosure regulations. To the extent that imperfect competition has been due to consumers' switch costs, their unwillingness to devote time to search, and associated adverse selection problems, market performance cannot be improved through increased discl
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 85 (1995)
Issue (Month): 5 (December)
Other versions of this item:
- Paul S. Calem & Loretta J. Mester, . "Consumer Behavior and the Stickiness of CreditCard Interest Rates," Rodney L. White Center for Financial Research Working Papers 3-94, Wharton School Rodney L. White Center for Financial Research.
- Paul S. Calem & Loretta J. Mester, 1994. "Consumer Behavior and the Stickiness of Credit Card Interest Rates," Center for Financial Institutions Working Papers 94-14, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Paul S. Calem & Loretta J. Mester, 1995. "Consumer behavior and the stickiness of credit card interest rates," Working Papers 95-10, Federal Reserve Bank of Philadelphia.
- Paul S. Calem & Loretta J. Mester, . "Consumer Behavior and the Stickiness of CreditCard Interest Rates," Rodney L. White Center for Financial Research Working Papers 03-94, Wharton School Rodney L. White Center for Financial Research.
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Voros) or (Michael P. Albert).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.