Improved Matching, Directed Search, and Bargaining in the Credit Card Market

Gajendran Raveendranathan

Department of Economics Working Papers from McMaster University

Abstract: I build a model of revolving credit in which consumers face idiosyncratic earnings risk, and credit card firms direct their search to consumers. Upon a match, they bargain over borrowing limits and borrowing interest rates — fixed for the duration of the match. Using the model, I show that improved matching between consumers and credit card firms, calibrated to match the rise in the population with credit cards, accounts for the rise in revolving credit and consumer bankruptcies in the United States. I also provide empirical evidence consistent with the two key features in my model: directed search and bargaining. The lifetime consumption gains from improved matching are 3.55 percent— substantially larger than those previously estimated by alternative explanations for the rise in revolving credit and consumer bankruptcies (0.03-0.57 percent). Finally, I analyze how the credit card firm’s bargaining power impacts the welfare of introducing stricter bankruptcy laws.

Keywords: revolving credit; consumer bankruptcy; matching; directed search; bargaining (search for similar items in EconPapers)
JEL-codes: E20 G20 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2018-01
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac, nep-mkt and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://socialsciences.mcmaster.ca/econ/rsrch/papers/archive/2018-05.pdf (application/pdf)

Related works:
Working Paper: Improved Matching, Directed Search, and Bargaining in the Credit Card Market (2018)
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:mcm:deptwp:2018-05

Access Statistics for this paper

More papers in Department of Economics Working Papers from McMaster University Contact information at EDIRC.
Bibliographic data for series maintained by ().