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Strategic responses to regulatory threat in the credit card market

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Author Info
Victor Stango

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Abstract

In November 1991, federal lawmakers threatened to place a binding cap on credit card interest rates. I find that credit card rates declined following the regulatory threat, more so for larger and more politically visible credit card issuers. A set of stock market event studies reveals that interest rate cuts announced after the threat led to positive abnormal returns, both for announcing issuers and their rivals. This pattern does not exist for similar rate cuts made outside the period of regulatory threat. The results suggest that firms may experience private benefits to price-cutting when doing so mitigates regulatory threat, and spillover benefits when another firm cuts prices in order to ease regulatory threat.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-02-02.

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Date of creation: 2002
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Handle: RePEc:fip:fedhwp:wp-02-02

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Keywords: Credit cards ; Consumer credit - Law and legislation;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Konar, Shameek & Cohen, Mark A., 1997. "Information As Regulation: The Effect of Community Right to Know Laws on Toxic Emissions," Journal of Environmental Economics and Management, Elsevier, vol. 32(1), pages 109-124, January. [Downloadable!] (restricted)
  2. Arora Seema & Cason Timothy N., 1995. "An Experiment in Voluntary Environmental Regulation: Participation in EPA's 33/50 Program," Journal of Environmental Economics and Management, Elsevier, vol. 28(3), pages 271-286, May. [Downloadable!] (restricted)
  3. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March. [Downloadable!] (restricted)
  4. Glazer, Amihai & McMillan, Henry, 1992. "Pricing by the Firm under Regulatory Threat," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 1089-99, August. [Downloadable!] (restricted)
  5. Victor Stango, 2000. "Competition And Pricing In The Credit Card Market," The Review of Economics and Statistics, MIT Press, vol. 82(3), pages 499-508, August. [Downloadable!] (restricted)
  6. Maxwell, John W & Lyon, Thomas P & Hackett, Steven C, 2000. "Self-Regulation and Social Welfare: The Political Economy of Corporate Environmentalism," Journal of Law & Economics, University of Chicago Press, vol. 43(2), pages 583-617, October.
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  7. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring. [Downloadable!] (restricted)
  8. Shaffer, Sherrill, 1999. "The Competitive Impact of Disclosure Requirements in the Credit Card Industry," Journal of Regulatory Economics, Springer, vol. 15(2), pages 183-98, March. [Downloadable!] (restricted)
  9. Becker, Gary S, 1983. "A Theory of Competition among Pressure Groups for Political Influence," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 371-400, August. [Downloadable!] (restricted)
  10. Nancy L. Rose, 1985. "The Incidence of Regulatory Rents in the Motor Carrier Industry," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 299-318, Autumn. [Downloadable!] (restricted)
  11. Ausubel, Lawrence M, 1991. "The Failure of Competition in the Credit Card Market," American Economic Review, American Economic Association, vol. 81(1), pages 50-81, March.
  12. Robin A. Prager, 1989. "Using Stock Price Data to Measure the Effects of Regulation: The Interstate Commerce Act and the Railroad Industry," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 280-290, Summer. [Downloadable!] (restricted)
  13. Pirrong, Stephen Craig, 1995. "The Self-Regulation of Commodity Exchanges: The Case of Market Manipulation," Journal of Law & Economics, University of Chicago Press, vol. 38(1), pages 141-206, April.
  14. Salinger, Michael, 1992. "Standard Errors in Event Studies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(01), pages 39-53, March. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Aysan, Ahmet Faruk & Müslim, Nusret Ahmet, 2006. "The Failure of Competition in the Credit Card Market in Turkey: The New Empirical Evidence," MPRA Paper 5483, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  2. Raphael Bostic & Anna L. Paulson & Hamid Mehran & Marc Saidenberg, 2005. "Regulatory Incentives and Consolidation: The Case of Commercial Bank Mergers and the Community Reinvestment Act," The B.E. Journal of Economic Analysis & Policy, Berkeley Electronic Press, vol. 0(1). [Downloadable!]
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