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Journal article
Dynamic Pricing of Credit Cards and the Effects of Regulation
JOURNAL OF FINANCIAL SERVICES RESEARCH, v 64(1), p81
Aug 2023
Featured in Collection : UN Sustainable Development Goals @ Drexel
Abstract
We construct a two-period model of revolving credit with asymmetric information and adverse selection. In the second period, lenders exploit an informational advantage with respect to their own customers. Those rents stimulate competition for customers in the first period. The informational advantage the current lender enjoys relative to its competitors determines interest rates, credit supply, and switching behavior. We evaluate the consequences of limiting the repricing of existing balances as implemented by recent legislation. Such restrictions increase deadweight losses and reduce ex ante consumer surplus. The model suggests novel approaches to identify empirically the effects of this law. We find the pattern of changes to interest rates and balance transfer activity before and after the CARD Act are consistent with the testable implications of the model.
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Details
- Title
- Dynamic Pricing of Credit Cards and the Effects of Regulation
- Publication Details
- JOURNAL OF FINANCIAL SERVICES RESEARCH, v 64(1), p81
- Publisher
- SPRINGER; NEW YORK
- Grant note
- We wish to acknowledge very useful insights from an anonymous referee, Thanos Athanasopoulos (discussant), Walter Beckert (discussant), Mitchell Berlin, Jesse Bricker, Glenn Canner, Paul Calem, Lukasz Drozd, Daniel Grodzicki, Michael Heller, Loretta Mester, Daniel Sanches, and seminar participants at ASSA 2015, Bocconi University, CRESSE 2018, MaCCI 2019 and CRETE 2019. We would also like to thank Mariah Allen and Ian McGroarty for excellent research assistance. Suting Hong acknowledges support from the ShanghaiTech University Start-up Fund. Any errors are entirely our own.
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Drexel University
- Web of Science ID
- WOS:000836746500001
- Scopus ID
- 2-s2.0-85135635752
- Other Identifier
- 991021861184804721
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- Collaboration types
- Domestic collaboration
- International collaboration
- Web of Science research areas
- Business, Finance