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Learning in the Credit Card Market

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Author Info
Sumit Agarwal
John C. Driscoll
Xavier Gabaix
David Laibson

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Abstract

Agents with more experience make better choices. We measure learning dynamics using a panel with four million monthly credit card statements. We study add-on fees, specifically cash advance, late payment, and overlimit fees. New credit card accounts generate fee payments of $15 per month. Through negative feedback -- i.e. paying a fee -- consumers learn to avoid triggering future fees. Paying a fee last month reduces the likelihood of paying a fee in the current month by about 40%. Controlling for account fixed effects, monthly fee payments fall by 75% during the first three years of account life. We find that learning is not monotonic. Knowledge effectively depreciates about 10% per month, implying that learning displays a strong recency effect.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13822.

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Date of creation: Feb 2008
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Handle: RePEc:nbr:nberwo:13822

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Find related papers by JEL classification:
D1 - Microeconomics - - Household Behavior
D40 - Microeconomics - - Market Structure and Pricing - - - General
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
G20 - Financial Economics - - Financial Institutions and Services - - - General

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(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. John Beshears & James J. Choi & David Laibson & Brigitte C. Madrian, 2008. "How are Preferences Revealed?," NBER Working Papers 13976, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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