Consumer and Producer Behavior in the Credit Card Market
Saturday, Jan. 7, 2017 2:30 PM – 4:30 PM
Hyatt Regency Chicago, Michigan 1A & 1B
- Chair: Neale Mahoney, University of Chicago
Teaser Rate Loans and Consumer Welfare
AbstractWe study the impact of teaser rate credit cards contracts, which have a zero introductory interest rate and a positive go-to rate that takes effect after a predetermined number of months. We specify a dynamic model of borrowing that captures consumers’ sensitivity to contemporaneous interest rates and the potential that consumers may not fully internalize higher interest rates in the future. We estimate the parameters of the model using administrative data on millions of credit card contracts and regression discontinuities in relationship between the go-to interest rate and a consumers’ credit scores. We use the model to quantify the extent to which consumers borrow in a dynamically optimal manner and to estimate the welfare effects of regulations that would prohibit teaser rate contracts.
Rainy Day Credit? Unsecured Credit and Local Employment Shocks
AbstractAggregate credit card balances fell by 15% during the Great Recession and have not yet surpassed their prior peak. This paper investigates the causes of the national cycle by exploiting geographic variation in the intensity and timing of the recession and recovery. Specifically, we instrument for local changes in employment and wages using a Bartik (1991) style methodology, based on pre-period county-level industrial composition interacted with nationwide industry trends. Using a high-quality dataset covering a large fraction of U.S. credit card accounts, we find that the number of accounts, purchase volumes, and payment volumes increase in response to plausibly exogenous positive employment shocks. Balances and interest rates decrease, and credit limits remain unchanged. We attempt to reconcile these findings with theoretical models of consumption decision-making and with nationwide aggregates. Countercyclical demand for credit card balances implies that procyclical credit supply responses are larger than previously estimated, and amplify rather than mitigate consumption volatility driven by the business cycle.
Credit Card Indebtedness and Community Influence
AbstractIn the past decades outstanding credit card debt in the U.S. has increased by nearly a factor of four from $200 billion in 1990 to $700 billion in 2015 (CARD Act Report 2015). Moreover, this increase was well distributed across households. By 2015 nearly 40% of U.S. households maintained credit card balances. These trends have sparked some debate regarding potential adverse effects from excessive levels of debt among consumers. In this paper we use an account-month level panel dataset comprising more than 85% of existing credit card accounts in the U.S. to explain the role communities play in influencing consumers’ decision to borrow on their credit cards. To identify the effect of the community on the individual, we instrument for average ownership in the community with the average ownership in areas from which non- native neighbors moved (Brown et. al. JF 2008). To the extent that communities influence individuals’ borrowing choices, shocks to individual debt ownership may exhibit spillover effects on others in the community through a social multiplier (Glaeser, Scheinkman, and Sacerdote JEEA 2003). In this analysis, we look decompose the direct and indirect, or spillover, effects of potential policies educating communities on the costs and hazards of excessive credit card debt. Ultimately, we seek to better understand the overall effects of consumer education on the levels and distribution of credit card indebtedness in the U.S.
- G1 - General Financial Markets
- L1 - Market Structure, Firm Strategy, and Market Performance