Learning in the Credit Card Market

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

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

John C. Driscoll

Board of Governors of the Federal Reserve System

Xavier Gabaix

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

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 I., 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)

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John C. Driscoll

Board of Governors of the Federal Reserve System ( email )

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Xavier Gabaix

Harvard University - Department of Economics ( email )

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David I. Laibson

Harvard University - Department of Economics ( email )

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