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
Date Written: March 30, 2010
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: Suggested Citation