Can demand elasticities explain sticky credit card rates?
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.
Volume (Year): (1996)
Issue (Month): Jul ()
|Contact details of provider:|| Postal: |
Web page: http://www.bos.frb.org/
More information through EDIRC
|Order Information:|| Email: |
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)
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.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 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.