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

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  • Paul S. Calem
  • Michael B. Gordy
  • Loretta J. Mester

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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Bibliographic Info

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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References

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  1. Mitchell Berlin & Loretta J. Mester, 1987. "Credit card rates and consumer search," Working Papers 88-1, Federal Reserve Bank of Philadelphia.
  2. 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.
  3. Mester, Loretta J, 1994. "Why Are Credit Card Rates Sticky?," Economic Theory, Springer, vol. 4(4), pages 505-30, May.
  4. Kerr, Sougata & Dunn, Lucia, 2008. "Consumer Search Behavior in the Changing Credit Card Market," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 345-353.
  5. 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.
  6. Stango, Victor, 2002. "Pricing with Consumer Switching Costs: Evidence from the Credit Card Market," Journal of Industrial Economics, Wiley Blackwell, vol. 50(4), pages 475-92, December.
  7. David B. Gross, 2002. "An Empirical Analysis of Personal Bankruptcy and Delinquency," Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 319-347, March.
  8. Mark Furletti, 2003. "Credit card pricing developments and their disclosure," Payment Cards Center Discussion Paper 03-02, Federal Reserve Bank of Philadelphia.
  9. 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.
  10. 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.
  11. Sandra E. Black & Donald P. Morgan, 1999. "Meet the new borrowers," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 5(Feb).
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