Relative prices and product substitution: Evidence from shocks to consumer credit interest rates

M. Lukas

Journal of Behavioral and Experimental Finance, 2019, vol. 21, issue C, 39-49

Abstract: This study examines the borrowing patterns resulting from product substitution in consumer credit. Based on a unique dataset with monthly data on fixed-rate installment and variable-rate revolving consumer credit, I find that borrowers are likely to substitute revolving credit for installment credit when the former is less costly according to a simple price-based decision rule. This effect is weaker for new clients. Borrowers who are likely to substitute revolving credit for installment credit are more likely to commit to minimum repayments, choose credit limits which resemble those of installment loans, and repay more than borrowers choosing revolving credit without applying that rule, thereby carrying less debt and paying less interest. These results shed new light on the potential consequences of product substitution in the credit market.

Keywords: Household finance; Consumer credit; Banking; Financial institutions (search for similar items in EconPapers)
JEL-codes: D12 D14 G21 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S2214635018301400

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:eee:beexfi:v:21:y:2019:i:c:p:39-49

DOI: 10.1016/j.jbef.2018.10.004

Access Statistics for this article

Journal of Behavioral and Experimental Finance is currently edited by Michael Dowling and Jürgen Huber

More articles in Journal of Behavioral and Experimental Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().