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Seemingly exploitative contracts

Pei Cheng Yu ()

Journal of Economic Behavior & Organization, 2020, vol. 176, issue C, 299-320

Abstract: This paper studies sequential price discrimination of sophisticated present-biased consumers in the credit market. The optimal contract utilizes present bias to improve screening by inducing certain consumers to over-consume and over-accumulate debt. This shows that the optimal contract can have features that seem exploitative. In essence, these features cause certain consumers to experience ex-post welfare losses even when they are sophisticated. If the intention of firms is to screen and not exploit consumers, then financial regulations aimed at protecting consumers by eliminating seemingly exploitative features could introduce additional distortions. In contrast, contracts that are truly exploitative induce over-consumption and over-accumulation of debt by taking advantage of the incorrect beliefs of non-sophisticated consumers.

Keywords: Credit contract; Financial regulation; Non-linear pricing; Present bias; Sequential screening (search for similar items in EconPapers)
JEL-codes: D18 D82 D86 G28 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Seemingly Exploitative Contracts (2018) Downloads
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DOI: 10.1016/j.jebo.2020.03.019

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