Consumer Time Inconsistency: Evidence from a market experiment in the credit card market
This paper analyzes a unique dataset, which contains results of a large-scale experiment in the credit card market. Two strange phenomena that suggest time inconsistency in consumer behavior are observed: First, consumers prefer an introductory offer which has a lower interest rate with a shorter duration to that of a higher interest rate with a longer duration, even though they would benefit more should they choose the latter. Second, consumers are very reluctant to switch, and even those consumers, who have switched before, fail to switch again later. A multi-period model with complete information is studied to show that the standard exponential preferences can't explain the observed behavior but the hyperbolic preferences can. Furthermore, we study a dynamic model where realistic random shocks are incorporated. Estimation results show that consumers have severe self-control problem, with a present-bias factor beta=0.8, and that the average switching cost is $150. With the estimated parameters, the dynamic model can replicate quantitative features of the data.
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|Date of creation:||11 Aug 2004|
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