IDEAS home Printed from
   My bibliography  Save this paper

Consumer Behavior and the Stickiness of Credit Card Interest Rates


  • Paul S. Calem
  • Loretta J. Mester


During several episodes of declining or rising interest rate changes in the 1980s and 1990s, credit card rates changed little. At the same time, credit cards consistently earned higher returns than most other bank products. Ausenbel (1991) argues the reason is that the industry deviates from a perfectly competitive model because consumers do not conform to the behavioral assumptions of perfect competition. Using data from the Federal Reserve's 1989 Survey of Consumer Finances, the authors provide specific evidence about consumer behavior. The analysis suggests that the three factors cited by Ausenbel - search costs, switch costs, and adverse selection problems for individual firms who change rates - has contributed to the observed performances in the credit market. The paper advances two theoretical arguments supporting the contention that credit card issuers face adverse selection problems. The authors find that credit card indebtedness is universally related to an individual's pro-pensity to comparison shop for terms. Consumers with substantial search costs tend to have big balances. Card issuers face an adverse selection problem induced by search costs. The authors find no evidence consumers underestimate their propensity to borrow. The authors find that households with larger balances are more likely to have experienced payment problems. These findings are evidence of adverse selection induced by switch costs. Thus, the authors' empirical findings support the view that competition in the credit card market is imperfect. These findings confirm bankers' arguments that credit card rates are sticky because consumers are not responsive to rate cuts. The authors' findings cast doubt on the efficacy of Fair Credit Disclosure regulations. To the extent that imperfect competition has been due to consumers' switch costs, their unwillingness to devote time to search, and associated adverse selection problems, market performance cannot be improved through increased disclosure. The authors' findings suggest focus on policies that reduce switch costs.

Suggested Citation

  • Paul S. Calem & Loretta J. Mester, 1994. "Consumer Behavior and the Stickiness of Credit Card Interest Rates," Center for Financial Institutions Working Papers 94-14, Wharton School Center for Financial Institutions, University of Pennsylvania.
  • Handle: RePEc:wop:pennin:94-14 Note: This paper is only available in hard copy

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    1. Paul J. Gertler & Donald M. Waldman, 1990. "Quality Adjusted Cost Functions," NBER Working Papers 3567, National Bureau of Economic Research, Inc.
    2. Joseph P. Hughes & Loretta J. Mester, "undated". "A Quality and Risk-Adjusted Cost Function for Banks: Evidence on the "Too-Big-To-Fail" Doctrine," Rodney L. White Center for Financial Research Working Papers 25-92, Wharton School Rodney L. White Center for Financial Research.
    3. Mester, Loretta J., 1991. "Agency costs among savings and loans," Journal of Financial Intermediation, Elsevier, vol. 1(3), pages 257-278, June.
    4. Hunter, William C & Timme, Stephen G & Yang, Won Keun, 1990. "An Examination of Cost Subadditivity and Multiproduct Production in Large U.S. Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(4), pages 504-525, November.
    5. Mester, Loretta J., 1992. "Traditional and nontraditional banking: An information-theoretic approach," Journal of Banking & Finance, Elsevier, vol. 16(3), pages 545-566, June.
    6. McAllister, Patrick H. & McManus, Douglas, 1993. "Resolving the scale efficiency puzzle in banking," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 389-405, April.
    7. Hannan, Timothy H & Hanweck, Gerald A, 1988. "Bank Insolvency Risk and the Market for Large Certificates of Deposit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(2), pages 203-211, May.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wop:pennin:94-14. 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: (Thomas Krichel). General contact details of provider: .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.