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Improved Matching, Directed Search, and Bargaining in the Credit Card Market

Author

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  • Gajendran Raveendranathan

Abstract

I build a model of revolving credit in which consumers face idiosyncratic earnings risk, and credit card firms direct their search to consumers. Upon a match, they bargain over borrowing limits and borrowing interest rates — fixed for the duration of the match. Using the model, I show that improved matching between consumers and credit card firms, calibrated to match the rise in the population with credit cards, accounts for the rise in revolving credit and consumer bankruptcies in the United States. I also provide empirical evidence consistent with the two key features in my model: directed search and bargaining. The lifetime consumption gains from improved matching are 3.55 percent— substantially larger than those previously estimated by alternative explanations for the rise in revolving credit and consumer bankruptcies (0.03-0.57 percent). Finally, I analyze how the credit card firm’s bargaining power impacts the welfare of introducing stricter bankruptcy laws.

Suggested Citation

  • Gajendran Raveendranathan, 2018. "Improved Matching, Directed Search, and Bargaining in the Credit Card Market," Department of Economics Working Papers 2018-05, McMaster University.
  • Handle: RePEc:mcm:deptwp:2018-05
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    File URL: http://socialsciences.mcmaster.ca/econ/rsrch/papers/archive/2018-05.pdf
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    References listed on IDEAS

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    1. Kartik Athreya & Juan M. Sánchez & Xuan S. Tam & Eric R. Young, 2018. "Bankruptcy And Delinquency In A Model Of Unsecured Debt," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(2), pages 593-623, May.
    2. Igor Livshits & James MacGee & Michèle Tertilt, 2010. "Accounting for the Rise in Consumer Bankruptcies," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 165-193, April.
    3. Victor Rios-Rull & Dean Corbae: & Satyajit Chatterjee, 2011. "A Theory of Credit Scoring and the Competitive Pricing of Default Risk," 2011 Meeting Papers 1115, Society for Economic Dynamics.
    4. Igor Livshits & James MacGee & Michèle Tertilt, 2007. "Consumer Bankruptcy: A Fresh Start," American Economic Review, American Economic Association, vol. 97(1), pages 402-418, March.
    5. Kartik Athreya & Xuan S. Tam & Eric R. Young, 2012. "A Quantitative Theory of Information and Unsecured Credit," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(3), pages 153-183, July.
    6. Kartik Arthreya & Juan Sanchez & Xuan Tam & Eric Young, 2015. "Labor Market Upheaval, Default Regulation, and Consumer Debt," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 32-52, January.
    7. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Econometrica, Econometric Society, vol. 75(6), pages 1525-1589, November.
    8. Igor Livshits & James C. Mac Gee & Michèle Tertilt, 2016. "The Democratization of Credit and the Rise in Consumer Bankruptcies," Review of Economic Studies, Oxford University Press, vol. 83(4), pages 1673-1710.
    9. Karen E. Dynan & Kathleen W. Johnson & Karen M. Pence, 2003. "Recent changes to a measure of U.S. household debt service," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 417-426.
    10. Fatih Guvenen & Serdar Ozkan & Jae Song, 2014. "The Nature of Countercyclical Income Risk," Journal of Political Economy, University of Chicago Press, vol. 122(3), pages 621-660.
    11. Mateos-Planas, Xavier & Seccia, Giulio, 2006. "Welfare implications of endogenous credit limits with bankruptcy," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 2081-2115, November.
    12. Zachary Bethune & Guillaume Rocheteau & Peter Rupert, 2015. "Aggregate Unemployment and Household Unsecured Debt," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 77-100, January.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Improved Matching, Directed Search, and Bargaining in the Credit Card Market
      by Christian Zimmermann in NEP-DGE blog on 2018-02-21 02:54:18

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    Cited by:

    1. Kyle Herkenhoff, 2014. "The Impact of Consumer Credit Access on Unemployment," 2014 Meeting Papers 448, Society for Economic Dynamics.
    2. Gajendran Raveendranathan & Kyle Herkenhoff, 2019. "Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry," 2019 Meeting Papers 67, Society for Economic Dynamics.

    More about this item

    Keywords

    revolving credit; consumer bankruptcy; matching; directed search; bargaining;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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