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Consumer Time Inconsistency: Evidence from a market experiment in the credit card market

Author

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  • Haiyan Shui
  • Lawrence M. Ausubel

Abstract

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.

Suggested Citation

  • Haiyan Shui & Lawrence M. Ausubel, 2004. "Consumer Time Inconsistency: Evidence from a market experiment in the credit card market," Econometric Society 2004 North American Summer Meetings 176, Econometric Society.
  • Handle: RePEc:ecm:nasm04:176
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    Cited by:

    1. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters,in: Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74 Edward Elgar Publishing.

    More about this item

    Keywords

    time inconsistency; consumer consumption; credit card debt;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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