Adverse Selection in the Credit Card Market: Evidence from Randomized Trials of Credit Card Solicitations

Journal of Money, Credit and Banking, Forthcoming

18 Pages Posted: 1 Apr 2010

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC)

Chunlin Liu

University of Nevada, Reno - College of Business

Date Written: March 30, 2010

Abstract

Using unique data from multiple large-scale randomized marketing trials of pre-approved credit card solicitations, we find that consumers responding to a lender’s inferior solicitation offers have poorer credit quality attributes. This finding supports the argument that riskier type borrowers are liquidity or credit constrained and thus have higher reservation loan interest rate. We also find that ex post the credit quality of cardholders with an inferior offer deteriorated more severely relative to those with a superior offer. After controlling for a cardholder’s observable risk attributes, demographic characteristics, and adverse economic shocks, we find that cardholders who responded to the inferior credit card offers are significantly more likely to default ex post. Our results provide evidence on the importance of adverse selection effects in the credit card market.

Keywords: Household Finance, Adverse Selection, Credit Cards, Consumer Credit, Information Asymmetry

JEL Classification: D12, D82, G2

Suggested Citation

Agarwal, Sumit and Chomsisengphet, Souphala and Liu, Chunlin, Adverse Selection in the Credit Card Market: Evidence from Randomized Trials of Credit Card Solicitations (March 30, 2010). Journal of Money, Credit and Banking, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1581809

Sumit Agarwal (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

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

Souphala Chomsisengphet

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

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