Consumer Behavior and the Stickiness of Credit Card Interest Rates
AbstractDuring several episodes of declining or rising interest rate changes in the 1980s and 1990s, credit card rates changed little. At the same time, credit cards consistently earned higher returns than most other bank products. Ausenbel (1991) argues the reason is that the industry deviates from a perfectly competitive model because consumers do not conform to the behavioral assumptions of perfect competition. Using data from the Federal Reserve's 1989 Survey of Consumer Finances, the authors provide specific evidence about consumer behavior. The analysis suggests that the three factors cited by Ausenbel - search costs, switch costs, and adverse selection problems for individual firms who change rates - has contributed to the observed performances in the credit market. The paper advances two theoretical arguments supporting the contention that credit card issuers face adverse selection problems. The authors find that credit card indebtedness is universally related to an individual's pro-pensity to comparison shop for terms. Consumers with substantial search costs tend to have big balances. Card issuers face an adverse selection problem induced by search costs. The authors find no evidence consumers underestimate their propensity to borrow. The authors find that households with larger balances are more likely to have experienced payment problems. These findings are evidence of adverse selection induced by switch costs. Thus, the authors' empirical findings support the view that competition in the credit card market is imperfect. These findings confirm bankers' arguments that credit card rates are sticky because consumers are not responsive to rate cuts. The authors' findings cast doubt on the efficacy of Fair Credit Disclosure regulations. To the extent that imperfect competition has been due to consumers' switch costs, their unwillingness to devote time to search, and associated adverse selection problems, market performance cannot be improved through increased disclosure. The authors' findings suggest focus on policies that reduce switch costs.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 94-14.
Date of creation: Jan 1994
Date of revision:
Note: This paper is only available in hard copy
Contact details of provider:
Postal: 3301 Steinberg Hall-Dietrich Hall, 3620 Locust Walk, Philadelphia, PA 19104.6367
Web page: http://fic.wharton.upenn.edu/fic/
More information through EDIRC
Other versions of this item:
- Calem, Paul S & Mester, Loretta J, 1995. "Consumer Behavior and the Stickiness of Credit-Card Interest Rates," American Economic Review, American Economic Association, vol. 85(5), pages 1327-36, December.
- Paul S. Calem & Loretta J. Mester, . "Consumer Behavior and the Stickiness of CreditCard Interest Rates," Rodney L. White Center for Financial Research Working Papers 3-94, Wharton School Rodney L. White Center for Financial Research.
- Paul S. Calem & Loretta J. Mester, . "Consumer Behavior and the Stickiness of CreditCard Interest Rates," Rodney L. White Center for Financial Research Working Papers 03-94, Wharton School Rodney L. White Center for Financial Research.
- 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.
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel).
If references are entirely missing, you can add them using this form.