Economic Models and Regulatory Remedies for the Problem of Consumer Credit

Abstract

Much has been written about the problem of consumer credit in the United States over the past decade. In this paper, we survey the prevailing economic theories of consumer credit, which identify a common root problem. Namely, consumers can potentially underestimate borrowing costs, and lenders can exploit this misperception. We then discuss classes of regulatory solutions to address this problem including prohibitions on credit products and terms and empowerment through education and disclosure. We also propose novel solutions including the introduction of a third category involving delegation of credit management to third parties with aligned incentives.

Keywords: Consumer Credit, Mortgages, Credit Cards, Payday Lending, Household Finance, Behavioral Finance

JEL Classification: D14, D18, G21, G28