Do Credit Card Companies Screen for Behavioral Biases?
Hong Ru and
Antoinette Schoar ()
No 22360, NBER Working Papers from National Bureau of Economic Research, Inc
We look at the supply side of the credit card market to analyze the pricing and marketing strategies of credit card offers. First, we show that card issuers target less-educated customers with more steeply back-loaded fees (e.g., lower introductory APRs but higher late and over-limit fees) compared offers made to educated customers. Second, issuers use rewards programs to screen for unobservable borrower types. Conditional on the same borrower type, cards with rewards, such as low introductory APR programs, also have more steeply backloaded fees. In contrast, cards with mileage programs, which are offered mainly to the most-educated consumers, rely much less on back-loaded fees. Finally, using shocks to the credit risk of customers via increases in state-level unemployment insurance, we show that card issuers rely more heavily on back-loaded and hidden fees when customers are less exposed to negative cash flow shocks. These findings are in line with the recent behavioral contract theory literature.
JEL-codes: G02 G1 G21 G23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-mkt and nep-pay
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