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Do Credit Card Companies Screen for Behavioral Biases?

47 Pages Posted: 15 Jun 2016 Last revised: 17 Feb 2017

Hong Ru

Nanyang Technological University

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

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Date Written: January 14, 2017

Abstract

We analyze the supply side of credit card markets, and the pricing and marketing strategies of issuers. First, card issuers target less-educated customers with more steeply back-loaded and hidden fees (e.g. higher late and over-limit fees). Second, issuers use rewards programs to screen for unobservable borrower types. Finally, we use increases in state-level unemployment insurance (UI) as positive shocks to creditworthiness and show that issuers rely more on back-loaded (hidden) fees when UI increases, especially for less-educated customers. This result documents a novel trade-off: card issuers weigh short-term fee maximization against increases in credit risk, when using back-loaded fees.

JEL Classification: G01, G02, G21, G23

Suggested Citation

Ru, Hong and Schoar, Antoinette, Do Credit Card Companies Screen for Behavioral Biases? (January 14, 2017). Available at SSRN: https://ssrn.com/abstract=2795030

Hong Ru (Contact Author)

Nanyang Technological University ( email )

S3-B1A-07, 50 Nanyang Avenue
Singapore, Singapore 639798
Singapore
(+65) 6790-4661 (Phone)

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

50 Memorial Drive, E52-447
Cambridge, MA 02142
United States
617-253-3763 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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