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Do Credit Card Companies Screen for Behavioral Biases?

59 Pages Posted: 20 Jun 2016  

Hong Ru

Nanyang Technological University

Antoinette Schoar

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

Multiple version iconThere are 2 versions of this paper

Date Written: June 2016

Abstract

We look at the supply side of the credit card market to analyze the pricing and marketing strategies of credit card offers. First, we show that card issuers target less-educated customers with more steeply back-loaded fees (e.g., lower introductory APRs but higher late and over-limit fees) compared offers made to educated customers. Second, issuers use rewards programs to screen for unobservable borrower types. Conditional on the same borrower type, cards with rewards, such as low introductory APR programs, also have more steeply backloaded fees. In contrast, cards with mileage programs, which are offered mainly to the most-educated consumers, rely much less on back-loaded fees. Finally, using shocks to the credit risk of customers via increases in state-level unemployment insurance, we show that card issuers rely more heavily on back-loaded and hidden fees when customers are less exposed to negative cash flow shocks. These findings are in line with the recent behavioral contract theory literature.

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Suggested Citation

Ru, Hong and Schoar, Antoinette, Do Credit Card Companies Screen for Behavioral Biases? (June 2016). NBER Working Paper No. w22360. Available at SSRN: https://ssrn.com/abstract=2797954

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 )

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