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Consumer protection and contingent charges

Author

Listed:
  • Armstrong, Mark
  • Vickers, John

Abstract

Contingent charges for financial services, such as fees for unauthorized overdrafts, are often controversial. We study the economics of contingent charges in a stylized setting with naive and sophisticated consumers. We contrast situations where the naive benefit from the presence of sophisticated consumers with situations where competition works to subsidize the sophisticated at the expense of the naive, arguably unfairly. The case for regulatory intervention in these situations depends in good part, but not only, on the weight placed on distributional concerns. The economic and legal issues at stake are well illustrated by a case on bank charges recently decided by the UK Supreme Court.

Suggested Citation

  • Armstrong, Mark & Vickers, John, 2012. "Consumer protection and contingent charges," MPRA Paper 37239, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:37239
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    References listed on IDEAS

    as
    1. Schwartz, Alan & Wilde, Louis L., 1983. "Imperfect Information in Markets for Contract Terms: The Examples of Warranties and Security Interests," Working Papers 480, California Institute of Technology, Division of the Humanities and Social Sciences.
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    4. Victor Stango & Jonathan Zinman, 2014. "Limited and Varying Consumer Attention: Evidence from Shocks to the Salience of Bank Overdraft Fees," Review of Financial Studies, Society for Financial Studies, vol. 27(4), pages 990-1030.
    5. Kosfeld, Michael & Schüwer, Ulrich, 2011. "Add-on Pricing, Naive Consumers, and the Hidden Welfare Costs of Education," CEPR Discussion Papers 8636, C.E.P.R. Discussion Papers.
    6. Michael D. Grubb, 2015. "Consumer Inattention and Bill-Shock Regulation," Review of Economic Studies, Oxford University Press, vol. 82(1), pages 219-257.
    7. 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.
    8. Mark Armstrong & John Vickers & Jidong Zhou, 2009. "Consumer Protection and the Incentive to Become Informed," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 399-410, 04-05.
    9. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
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    13. Victor Stango & Jonathan Zinman, 2009. "What Do Consumers Really Pay on Their Checking and Credit Card Accounts? Explicit, Implicit, and Avoidable Costs," American Economic Review, American Economic Association, vol. 99(2), pages 424-429, May.
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    More about this item

    Keywords

    Consumer protection; retail banking; bounded rationality; economics of contracts;

    JEL classification:

    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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