Information, Contract Design, and Unsecured Credit Supply: Evidence from Credit Card Mailings

Song Han, Benjamin Keys and Geng Li

No 2015-103, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: How do lenders of unsecured credit use screening and contract design to mitigate the risks of information asymmetry and limited commitment in the absence of collateral? To address this question, we take advantage of a unique dataset of over 200,000 credit card mail solicitations to a representative sample of households over the recent credit cycle--a period that includes the implementation of the CARD Act. We find that while lenders use credit scores as a prominent screening device, they also take into account a wide array of other information on borrowers' credit histories and financial and demographic characteristics. For instance, the likelihood of receiving an offer is sensitive to the exact timing of a prior bankruptcy filing. We also find that credit market conditions affect the marginal information used in lenders' offer decisions, as lenders sharply reduced credit supplied to subprime borrowers during the crisis and in response to the CARD Act. Finally, we document that lenders extend multiple distinct offers to the same consumers over a relatively short period, likely designed such that consumers reveal private information in their choice of contract.

Keywords: Credit supply; information asymmetry; credit cards; mail solicitation; personal bankruptcy; CARD Act; household finances (search for similar items in EconPapers)
Pages: 54 pages
Date: 2015-11-16
New Economics Papers: this item is included in nep-ban and nep-pay
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2015-103

DOI: 10.17016/FEDS.2015.103

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