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The Importance of Adverse Selection in the Credit Card Market: Evidence from Randomized Trials of Credit Card Solicitations

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  • SUMIT AGARWAL
  • SOUPHALA CHOMSISENGPHET
  • CHUNLIN LIU

Abstract

Analyzing unique data from multiple large-scale randomized marketing trials of preapproved credit card solicitations by a large financial institution, we find that consumers responding to the lender's "inferior" solicitation offers have poorer credit quality attributes. This finding supports the argument that riskier type borrowers are liquidity or credit constrained and, thus, have higher reservation loan interest rates. We also find a more severe deterioration "ex post" in the credit quality of the booked accounts of inferior offer types relative to superior offers. After controlling for a cardholder's observable risk attributes, demographic characteristics, and adverse economic shocks, we find that cardholders who responded to the inferior credit card offers are significantly more likely to default "ex post". Our results provide evidence on the importance of adverse selection effects in the credit card market. Copyright (c) 2010 The Ohio State University.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 42 (2010)
Issue (Month): 4 (06)
Pages: 743-754

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Handle: RePEc:mcb:jmoncb:v:42:y:2010:i:4:p:743-754

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Kevin Amess & Leigh Drake & Helen Knight, 2010. "An Empirical Analysis of UK Credit Card Pricing," Review of Industrial Organization, Springer, vol. 37(2), pages 101-117, September.
  2. Sumit Agarwal & Sujit Chakravorti & Anna Lunn, 2010. "Why do banks reward their customers to use their credit cards?," Working Paper Series WP-2010-19, Federal Reserve Bank of Chicago.
  3. Abbas Valadkhani & Sajid Anwar & Amir Arjonandi, 2012. "How to capture the full extent of price stickiness in credit card interest rates?," Economics Working Papers wp12-02, School of Economics, University of Wollongong, NSW, Australia.
  4. Baldwin, Kate & Bhavnani, Rikhil R., 2013. "Ancillary experiments: Opportunities and challenges," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  5. Deryugina, Tatyana, 2012. "Does Selection in Insurance Markets Always Favor Buyers?," MPRA Paper 53583, University Library of Munich, Germany.

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