The Importance of Adverse Selection in the Credit Card Market: Evidence from Randomized Trials of Credit Card Solicitations

Sumit Agarwal, Souphala Chomsisengphet and Chunlin Liu

Journal of Money, Credit and Banking, 2010, vol. 42, issue 4, 743-754

Abstract: Analyzing unique data from multiple large-scale randomized marketing trials of preapproved credit card solicitations by a large financial institution, we find that consumers responding to the lender's "inferior" solicitation offers have poorer credit quality attributes. This finding supports the argument that riskier type borrowers are liquidity or credit constrained and, thus, have higher reservation loan interest rates. We also find a more severe deterioration "ex post" in the credit quality of the booked accounts of inferior offer types relative to superior offers. After controlling for a cardholder's observable risk attributes, demographic characteristics, and adverse economic shocks, we find that cardholders who responded to the inferior credit card offers are significantly more likely to default "ex post". Our results provide evidence on the importance of adverse selection effects in the credit card market. Copyright (c) 2010 The Ohio State University.

Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:42:y:2010:i:4:p:743-754

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