The Hidden Role of Contract Terms: The Case of Credit Card Minimum Payments in Mexico

Paolina C. Medina () and Jose L. Negrin ()
Additional contact information
Paolina C. Medina: Mays Business School, Texas A&M University, College Station, Texas 77845
Jose L. Negrin: Banco de Mexico, Mexico City 06059, Mexico

Management Science, 2022, vol. 68, issue 5, 3856-3877

Abstract: This paper argues that thresholds in financial contracts act as implicit nudges in consumers’ decisions. Exploiting a regulatory change to credit card minimum payments in Mexico, we find that a 1-percentage point change in minimum payments leads to a 0.87-percentage point change in actual payments, both expressed as a percentage of total balances. We decompose the effect of minimum payments into a constraining effect and a reference effect. The former captures the effect of minimum payments as a binding constraint and accounts for 59% of its total effect. The latter captures any remaining impact of changes in minimum payments beyond their constraining effect and represents 41% of the total. In turn, 67% of the reference effect is explained by the multiple heuristic : the tendency of consumers to pay whole-number multiples of the minimum payment.

Keywords: credit cards; household finance; consumer credit; regulation (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2021.4006 (application/pdf)

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:inm:ormnsc:v:68:y:2022:i:5:p:3856-3877

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().