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Bank overdraft pricing and myopic consumers

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  • Williams, Marlon L.

Abstract

In recent years, banks have routinely earned annual percentage rates of over 1,000 percent on overdraft services. Such returns are staggeringly high, especially in an arguably competitive industry; and consequently, consumer protection groups have been lobbying for increased oversight of bank overdraft fees (and similar fees). In the context of a model proposed by Gabaix and Laibson 2006, I find support for the argument that banks target myopic consumers — consumers who do not consider the add-on good when choosing the base product. Using demographic characteristics to proxy for the proportion of myopic consumers, I find results that are consistent with Gabaix and Laibson 2006 in the pricing of bank overdraft services.

Suggested Citation

  • Williams, Marlon L., 2016. "Bank overdraft pricing and myopic consumers," Economics Letters, Elsevier, vol. 139(C), pages 84-87.
    • Handle: RePEc:eee:ecolet:v:139:y:2016:i:c:p:84-87
    DOI: 10.1016/j.econlet.2015.12.022
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    References listed on IDEAS

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    1. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters, in: Victor J. Tremblay & Elizabeth Schroeder & Carol Horton Tremblay (ed.), Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74, Edward Elgar Publishing.
    2. Christopher B. Bumcrot & Judy Lin & Annamaria Lusardi, 2011. "The Geography of Financial Literacy," Working Papers 893, RAND Corporation.
    3. Marc Fusaro, 2008. "Hidden Consumer Loans: An Analysis of Implicit Interest Rates on Bounced Checks," Journal of Family and Economic Issues, Springer, vol. 29(2), pages 251-263, June.
    4. Stefano DellaVigna & Ulrike Malmendier, 2006. "Paying Not to Go to the Gym," American Economic Review, American Economic Association, vol. 96(3), pages 694-719, June.
    5. Deaton, Angus, 1985. "Panel data from time series of cross-sections," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 109-126.
    6. Fusaro, Marc Anthony, 2010. "Are "bounced check loans" really loans? Theory, evidence and policy," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(4), pages 492-500, November.
    7. Christopher B. Bumcrot & Judy Lin & Annamaria Lusardi, 2011. "The Geography of Financial Literacy," Working Papers WR-893-SSA, RAND Corporation.
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    Citations

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    Cited by:

    1. Robert M. Adams, 2017. "Bank Fees, Aftermarkets, and Consumer Behavior," Finance and Economics Discussion Series 2017-054, Board of Governors of the Federal Reserve System (U.S.).
    2. Marco Migueis & Michael Suher & Jessie Xu, 2022. "Cost of Banking for LMI and Minority Communities," Finance and Economics Discussion Series 2022-040, Board of Governors of the Federal Reserve System (U.S.).
    3. Fourberg, Niklas & Marques-Magalhaes, Katrin & Wiewiorra, Lukas, 2022. "They are among us: Pricing behavior of algorithms in the field," WIK Working Papers 6, WIK Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste GmbH, Bad Honnef.
    4. Shy, Oz & Stavins, Joanna, 2024. "Who is paying all these fees? An empirical analysis of bank account and credit card fees," Journal of Economics and Business, Elsevier, vol. 129(C).
    5. Fourberg, Niklas & Marques Magalhaes, Katrin & Wiewiorra, Lukas, 2023. "They Are Among Us: Pricing Behavior of Algorithms in the Field," 32nd European Regional ITS Conference, Madrid 2023: Realising the digital decade in the European Union – Easier said than done? 277958, International Telecommunications Society (ITS).

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    More about this item

    Keywords

    Banks; Overdraft; Myopic consumers; Bank pricing; Add-on pricing;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L8 - Industrial Organization - - Industry Studies: Services

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