Consumer rationality and credit card pricing: An explanation based on the option value of credit lines

Sangkyun Park
Additional contact information
Sangkyun Park: Office of Management and Budget, USA, Postal: Office of Management and Budget, USA

Managerial and Decision Economics, 2004, vol. 25, issue 5, 243-254

Abstract: An option is embedded in credit cards. Since credit cards offer open credit lines, cardholders can borrow at the same terms when they become riskier. This option value raises the zero-profit card rate. Furthermore, adverse selection occurs if cardholders are better informed about the probability of becoming riskier in the future and borrow more when they become riskier. The adverse selection can limit rate competition and keep the card rate above the zero-profit card rate. An up-front fee is not a good alternative because it is also vulnerable to adverse selection. A low introductory card rate is an effective way to avoid the adverse selection problem when asymmetric information is mainly about the change in the borrower's risk profile in the future, as opposed to the riskiness in the present period. Copyright © 2004 John Wiley & Sons, Ltd.

Date: 2004
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://hdl.handle.net/10.1002/mde.1146 Link to full text; subscription required (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:mgtdec:v:25:y:2004:i:5:p:243-254

DOI: 10.1002/mde.1146

Access Statistics for this article

Managerial and Decision Economics is currently edited by Antony Dnes

More articles in Managerial and Decision Economics from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().