This setting lets you change the way you view articles. You can choose to have articles open in a dialog window, a new tab, or directly in the same window.
Open in Dialog
Open in New Tab
Open in same window

American Economic Review: Vol. 100 No. 5 (December 2010)


Quick Tools:

Print Article Summary
Export Citation
Sign up for Email Alerts Follow us on Twitter


AER - All Issues

AER Forthcoming Articles

Exploiting Naïvete about Self-Control in the Credit Market

Article Citation

Heidhues, Paul, and Botond Kőszegi. 2010. "Exploiting Naïvete about Self-Control in the Credit Market." American Economic Review, 100(5): 2279-2303.

DOI: 10.1257/aer.100.5.2279


We analyze contract choices, loan-repayment behavior, and welfare in a model of a competitive credit market when borrowers have a taste for immediate gratification. Consistent with many credit cards and subprime mortgages, for most types of nonsophisticated borrowers the baseline repayment terms are cheap, but they are also inefficiently front loaded and delays require paying large penalties. Although credit is for future consumption, nonsophisticated consumers overborrow, pay the penalties, and back load repayment, suffering large welfare losses. Prohibiting large penalties for deferring small amounts of repayment—akin to recent regulations in the US credit-card and mortgage markets—can raise welfare. (JEL D14, D18, D49, D86)

Article Full-Text Access

Full-text Article

Additional Materials

Online Appendix (223.86 KB)


Heidhues, Paul (ESMT European School of Management and Technology GmbH, Berlin)
Kőszegi, Botond (U CA, Berkeley)

JEL Classifications

D14: Personal Finance
D18: Consumer Protection
D49: Market Structure and Pricing: Other
D86: Economics of Contract: Theory

American Economic Review

Quick Tools:

Sign up for Email Alerts

Follow us on Twitter

Subscription Information
(Institutional Administrator Access)


AER - All Issues

AER - Forthcoming Articles

Virtual Field Journals

AEA Member Login:

AEAweb | AEA Journals | Contact Us