IDEAS home Printed from https://ideas.repec.org/a/fip/fedbne/y1996ijulp43-54.html
   My bibliography  Save this article

Can demand elasticities explain sticky credit card rates?

Author

Listed:
  • Joanna Stavins

Abstract

Sticky interest rates on credit card plans have long been a mystery. One possible explanation is that banks maintain high rates because consumers' demand for credit card loans is inelastic. This study tests and rejects that hypothesis. Demand for credit card loans is found to be elastic with respect to interest rates charged, and the amount of delinquent loans is found to increase significantly more than total credit card loans when interest rates drop.> The results show that banks face an adverse selection problem: Lowering the annual percentage rate of interest (APR) would attract risky customers and increase delinquent loans at a significantly higher rate than loans in general. This induces banks to maintain high interest rates. The adverse selection hypothesis is further supported by the finding that banks' income from credit card fees and interest increases with APR. Consumers' demand is also found to be responsive to some of the enhancements added to the terms of credit card plans. Banks may find it optimal to charge high interest rates, while adding enhancements in order to attract customers and raise their income at a low cost.

Suggested Citation

  • Joanna Stavins, 1996. "Can demand elasticities explain sticky credit card rates?," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 43-54.
  • Handle: RePEc:fip:fedbne:y:1996:i:jul:p:43-54
    as

    Download full text from publisher

    File URL: http://www.bostonfed.org/economic/neer/neer1996/neer496c.htm
    Download Restriction: no

    File URL: http://www.bostonfed.org/economic/neer/neer1996/neer496c.pdf
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Brian Mantel, 2000. "Why don't consumers use electronic banking products? towards a theory of obstacles, incentives, and opportunities," Occasional Paper; Emerging Payments EPS-2000-1, Federal Reserve Bank of Chicago.
    2. Timothy Crack & Helen Roberts, 2015. "Credit card balances and repayment under competing minimum payment regimes," Review of Quantitative Finance and Accounting, Springer, vol. 45(4), pages 785-801, November.
    3. repec:eee:finlet:v:24:y:2018:i:c:p:145-150 is not listed on IDEAS
    4. Sujit Chakravorti & William R. Emmons, 2001. "Who pays for credit cards?," Occasional Paper; Emerging Payments EPS-2001-1, Federal Reserve Bank of Chicago.
    5. Brian Mantel & Timothy McHugh, 2001. "Competition and innovation in the consumer e-payments market? considering the demand, supply, and public policy issues," Occasional Paper; Emerging Payments EPS-2001-4, Federal Reserve Bank of Chicago.
    6. Lucia Dunn & TaeHyung Kim, 1999. "Empirical Investigation of Credit Card Default," Working Papers 99-13, Ohio State University, Department of Economics.
    7. Ayadi, O. Felix, 1997. "Adverse selection, search costs and sticky credit card rates," Financial Services Review, Elsevier, vol. 6(1), pages 53-67.

    More about this item

    Keywords

    Credit cards;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedbne:y:1996:i:jul:p:43-54. See general 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: (Catherine Spozio). General contact details of provider: http://edirc.repec.org/data/frbbous.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.