Abstract

http://ssrn.com/abstract=843826
 
 

References (31)



 
 

Citations (34)



 


 



Do Consumers Choose the Right Credit Contracts?


Sumit Agarwal


National University of Singapore

Souphala Chomsisengphet


US Department of Treasury - Office of the Comptroller of the Currency (OCC)

Chunlin Liu


University of Nevada, Reno - College of Business

Nicholas S. Souleles


University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

November 2006


Abstract:     
A number of studies have pointed to various mistakes that consumers might make in their consumption-saving and financial decisions. We utilize a unique market experiment conducted by a large U.S. bank to assess how systematic and costly such mistakes are in practice. The bank offered consumers a choice between two credit card contracts, one with an annual fee but a lower interest rate and one with no annual fee but a higher interest rate. To minimize their total interest costs net of the fee, consumers expecting to borrow a sufficiently large amount should choose the contract with the fee, and vice-versa.

We find that on average consumers chose the contract that ex post minimized their net costs. A substantial fraction of consumers (about 40%) still chose the ex post sub-optimal contract, with some incurring hundreds of dollars of avoidable interest costs. Nonetheless, the probability of choosing the sub-optimal contract declines with the dollar magnitude of the potential error, and consumers with larger errors were more likely to subsequently switch to the optimal contract. Thus most of the errors appear not to have been very costly, with the exception that a small minority of consumers persists in holding substantially sub-optimal contracts without switching.

Number of Pages in PDF File: 26

Keywords: consumption, borrowing, debt, balance sheets, consumer credit, credit cards, banking

JEL Classification: G11, G21, E21, E51

working papers series


Download This Paper

Date posted: November 13, 2005 ; Last revised: December 13, 2011

Suggested Citation

Agarwal, Sumit and Chomsisengphet, Souphala and Liu, Chunlin and Souleles, Nicholas S., Do Consumers Choose the Right Credit Contracts? (November 2006). Available at SSRN: http://ssrn.com/abstract=843826 or http://dx.doi.org/10.2139/ssrn.843826

Contact Information

Sumit Agarwal
National University of Singapore ( email )
15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)
HOME PAGE: http://www.ushakrisna.com
Souphala Chomsisengphet
US Department of Treasury - Office of the Comptroller of the Currency (OCC) ( email )
400 7th Street, SW
Washington, DC 20219
United States
202-649-5533 (Phone)
Chunlin Liu
University of Nevada, Reno - College of Business ( email )
University of Nevada, Reno
Reno, NV 89557-0016
United States
Nicholas S. Souleles (Contact Author)
University of Pennsylvania - Finance Department ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-9466 (Phone)
215-898-6200 (Fax)
HOME PAGE: http://finance.wharton.upenn.edu/~souleles

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Feedback to SSRN


Paper statistics
Abstract Views: 3,315
Downloads: 567
Download Rank: 13,858
References:  31
Citations:  34

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo5 in 0.234 seconds