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Learning in the Credit Card Market

44 Pages Posted: 6 Apr 2008 Last revised: 26 Apr 2013

Sumit Agarwal

Georgetown University - Department of Finance

John C. Driscoll

Federal Reserve Board

Xavier Gabaix

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); New York University - Stern School of Business

David Laibson

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 24, 2013

Abstract

We measure learning and forgetting dynamics using a panel with four million monthly credit card statements. Through negative feedback -- i.e. paying a fee -- consumers learn to avoid future fees. Paying a fee last month reduces fee payment in the current month by 40%. Monthly fee payments fall by 75% during the first four years of a card holder's account life. Consumers forget some of what they learn and exhibit a strong recency effect: knowledge depreciates about 10% or more per month. Higher-income borrowers learn twice as fast, and forget twice as slowly, as lower-income borrowers.

Keywords: household finance, consumer finance, credit cards, feedback, learning, learning-by-doing, recency

JEL Classification: D1, D4, D8, G2

Suggested Citation

Agarwal, Sumit and Driscoll, John C. and Gabaix, Xavier and Laibson, David, Learning in the Credit Card Market (April 24, 2013). Available at SSRN: https://ssrn.com/abstract=1091623 or http://dx.doi.org/10.2139/ssrn.1091623

Sumit Agarwal (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-8207 (Phone)

HOME PAGE: http://www.ushakrisna.com

John C. Driscoll

Federal Reserve Board ( email )

20th and C Streets, NW
Washington, DC 20551
United States

HOME PAGE: http://www.federalreserve.gov/econresdata/john-c-driscoll.htm

Xavier Gabaix

New York University - Stern School of Business ( email )

Stern School of Business
44 West 4th Street, Suite 9-190
New York, NY 10012-1126
United States

HOME PAGE: http://pages.stern.nyu.edu/~xgabaix/

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

David I. Laibson

Harvard University - Department of Economics ( email )

Littauer Center
Room M-14
Cambridge, MA 02138
United States
617-496-3402 (Phone)
617-495-8570 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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