Estimating the Demand for Credit Card: A Regression Discontinuity Approach

Abstract

Using the credit card application data provided by a major credit card issuer, we estimate the demand for credit card using a regression discontinuity method. Our method exploits a unique feature of the credit card solicitation campaign design, i.e. credit issuer gives consumers different interest rate based on some cutoff points in consumers' credit score. This discontinuity in the interest rate offers allows us to obtain a reliable estimate of the effect of the interest rate on consumers' credit demand. We find that consumers' demand for credit card is near unit elasticity. The demand elasticity is estimated at -1.14. In addition, consumers with better credit rating are more responsive to interest rate than consumers with lower credit rating. We also find that, without controlling for the endogeneity of contracts, a regression model would give biased estimates.

Keywords: Demand Estimation, Regression Discontinuity, Credit Card

JEL Classification: L1