Consumer and Producer Behavior in the Credit Card Market

Paper Session

Saturday, Jan. 7, 2017 2:30 PM – 4:30 PM

Hyatt Regency Chicago, Michigan 1A & 1B
Hosted By: American Economic Association
  • Chair: Neale Mahoney, University of Chicago

Bounding the Costs of Bounded Rationality: Evidence From Credit Cards

Victor Stango
,
University of California-Davis
Jonathan Zinman
,
Dartmouth College

Abstract

Arguments abound that consumers leave money on the table due to imperfect information, inattention, and heuristics such as mental accounting. We assess the economic importance of such frictions by examining how U.S. borrowers allocate debt across their credit cards. The scope for leaving money on the table via misallocation is large, but actual misallocation is small in dollar terms. Patterns of misallocation across and within borrowers are consistent with models in which consumers trade pecuniary costs and non-pecuniary benefits of misallocation against non-pecuniary costs of expending scarce time and cognitive resources. Our results contrast, for sensible reasons that we explain, with some other recent work examining the efficiency of credit card debt allocation.

Teaser Rate Loans and Consumer Welfare

Sumit Agarwal
,
National University of Singapore
Souphala Chomsisengphet
,
Office of the Comptroller of the Currency
Neale Mahoney
,
University of Chicago
Johannes Stroebel
,
New York University

Abstract

We 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

Benjamin Keys
,
University of Chicago
Jialan Wang
,
Consumer Financial Protection Bureau

Abstract

Aggregate 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

Alexei Alexandrov
,
Consumer Financial Protection Bureau
Daniel Grodzicki
,
Pennsylvania State University

Abstract

In 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.
JEL Classifications
  • G1 - General Financial Markets
  • L1 - Market Structure, Firm Strategy, and Market Performance