Unintended Consequences of the Credit Card Act

Tiago Pinheiro and Joshua Ronen

Journal of Law, Finance, and Accounting, 2016, vol. 1, issue 1, 93-138

Abstract: This article evaluates the impact on consumer welfare of the constraints on increasing interest rates present in the Credit Card Act. We develop a model of consumer financing in a setting where information asymmetry between a consumer and a lender arises over time and triggers adverse selection. We find the competitive equilibrium of this setting and show that restrictions on increasing the interest rate, as in the Credit Card Act, are welfare decreasing for a large set of parameters. The Card’s restrictions lead to higher credit card interest rates for low credit-quality consumers and lower credit limit for high credit-quality consumers; these negative effects on welfare are only partially offset by lower up-front fees. We find similar results when we extend our analysis to settings in which consumers have limited rationality.

Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:now:jnllfa:108.00000006

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