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Switching costs and adverse selection in the market for credit cards: new evidence

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Author Info
Paul S. Calem
Michael B. Gordy
Loretta J. Mester

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Abstract

To explain persistence of credit card interest rates at relatively high levels, Calem and Mester (AER, 1995) argued that informational barriers create switching costs for high-balance customers. As evidence, using data from the 1989 Survey of Consumer Finances, they showed that these households were more likely to be rejected when applying for new credit. In this paper, they revisit the question using the 1998 and 2001 SCF. Further, they use new information on card interest rates to test for pricing effects consistent with information-based switching costs. The authors find that informational barriers to competition persist, although their role may have declined. ; Also issued as Payment Cards Center Discussion Paper No. 05-09

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 05-16.

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Date of creation: 2005
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Handle: RePEc:fip:fedpwp:05-16

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Keywords: Credit cards

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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. 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.
  2. Mark Furletti, 2003. "Credit card pricing developments and their disclosure," Payment Cards Center Discussion Paper 03-02, Federal Reserve Bank of Philadelphia. [Downloadable!]
  3. 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.
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  4. Berlin, Mitchell & Mester, Loretta J., 2004. "Credit card rates and consumer search," Review of Financial Economics, Elsevier, vol. 13(1-2), pages 179-198. [Downloadable!] (restricted)
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  5. Mester, Loretta J, 1994. "Why Are Credit Card Rates Sticky?," Economic Theory, Springer, vol. 4(4), pages 505-30, May.
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  6. 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)
  7. Robert B. Avery & Paul S. Calem & Glenn B. Canner, 2003. "An overview of consumer data and credit reporting," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Feb, pages 47-73. [Downloadable!]
  8. Stango, Victor, 2002. "Pricing with Consumer Switching Costs: Evidence from the Credit Card Market," Journal of Industrial Economics, Blackwell Publishing, vol. 50(4), pages 475-92, December. [Downloadable!] (restricted)
  9. Lucia Dunn & Sougata Kerr, 2002. "Consumer Search Behavior in the Changing Credit Card Market," Working Papers 02-03, Ohio State University, Department of Economics. [Downloadable!]
  10. David B. Gross, 2002. "An Empirical Analysis of Personal Bankruptcy and Delinquency," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 15(1), pages 319-347, March.
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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. Gabriel Jiménez & José A. López & Jesús Saurina, 2008. "Empirical analysis of corporate credit lines," Banco de España Working Papers 0821, Banco de España. [Downloadable!]
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  2. Sumit Agarwal & Souphala Chomsisengphet & Chunlin Liu & Nicholas S. Souleles, 2006. "Do consumers choose the right credit contracts?," Working Paper Series WP-06-11, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
  3. Kartik Athreya & Xuan S. Tam & Eric R. Young, 2008. "A quantitative theory of information and unsecured credit," Working Paper 08-06, Federal Reserve Bank of Richmond. [Downloadable!]
  4. Charles Sprenger & Joanna Stavins, 2008. "Credit card debt and payment use," Working Papers 08-2, Federal Reserve Bank of Boston. [Downloadable!]
  5. John N. Muellbauer, 2007. "Housing, credit and consumer expenditure," Proceedings, Federal Reserve Bank of Kansas City, pages 267- 334. [Downloadable!]
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  6. Emilio Fernandez-Corugedo & John Muellbauer, . "Consumer credit conditions in the United Kingdom," Bank of England working papers 314, Bank of England. [Downloadable!]
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