Do Credit Card Companies Screen for Behavioral Biases? / Hong Ru, Antoinette Schoar.

Format:

Book

Author/Creator:

Ru, Hong.

Contributor:

National Bureau of Economic Research.

Schoar, Antoinette.

Series:

Working Paper Series (National Bureau of Economic Research) no. w22360.

NBER working paper series no. w22360

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

We look at the supply side of the credit card market to analyze the pricing and marketing strategies of credit card offers. First, we show that card issuers target less-educated customers with more steeply back-loaded fees (e.g., lower introductory APRs but higher late and over-limit fees) compared offers made to educated customers. Second, issuers use rewards programs to screen for unobservable borrower types. Conditional on the same borrower type, cards with rewards, such as low introductory APR programs, also have more steeply backloaded fees. In contrast, cards with mileage programs, which are offered mainly to the most-educated consumers, rely much less on back-loaded fees. Finally, using shocks to the credit risk of customers via increases in state-level unemployment insurance, we show that card issuers rely more heavily on back-loaded and hidden fees when customers are less exposed to negative cash flow shocks. These findings are in line with the recent behavioral contract theory literature.

Notes:

Print version record

June 2016.