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

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

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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Suggested Citation

  • Calem, Paul S. & Gordy, Michael B. & Mester, Loretta J., 2006. "Switching costs and adverse selection in the market for credit cards: New evidence," Journal of Banking & Finance, Elsevier, vol. 30(6), pages 1653-1685, June.
  • Handle: RePEc:eee:jbfina:v:30:y:2006:i:6:p:1653-1685
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    References listed on IDEAS

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    1. Mitchell Berlin & Loretta J. Mester, 2004. "Credit card rates and consumer search," Review of Financial Economics, John Wiley & Sons, vol. 13(1-2), pages 179-198.
    2. Mester, Loretta J, 1994. "Why Are Credit Card Rates Sticky?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(4), pages 505-530, May.
    3. 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.
    4. 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.
    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. 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 1327-1336, December.
    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.), vol. 89(Feb), pages 47-73, February.
    8. 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.
    9. Stango, Victor, 2002. "Pricing with Consumer Switching Costs: Evidence from the Credit Card Market," Journal of Industrial Economics, Wiley Blackwell, vol. 50(4), pages 475-492, December.
    10. Mitchell Berlin & Loretta J. Mester, 2004. "Credit card rates and consumer search," Review of Financial Economics, John Wiley & Sons, vol. 13(1-2), pages 179-198.
    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).
    12. Mark Furletti, 2003. "Credit card pricing developments and their disclosure," Consumer Finance Institute discussion papers 03-02, Federal Reserve Bank of Philadelphia.
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