Dynamic Pricing of Credit Cards and the Effects of Regulation

52 Pages Posted: 8 Nov 2018 Last revised: 29 Apr 2020

See all articles by Suting Hong

Suting Hong

ShanghaiTech University - School of Entrepreneurship and Management

Robert M. Hunt

Consumer Finance Institute, Federal Reserve Bank of Philadelphia

Konstantinos Serfes

Drexel University

Date Written: 2018-11-07

Abstract

We construct a two-period model of revolving credit with asymmetric information and adverse selection.In the second period, lenders exploit an informational advantage with respect to their own customers. Those rents stimulate competition for customers in the first period. The informational advantage the current lender enjoys relative to its competitors determines interest rates, credit supply, and switching behavior. We evaluate the consequences of limiting the repricing of existing balances as implemented by recent legislation. Such restrictions increase deadweight losses and reduce ex ante consumer surplus. The model suggests novel approaches to identify empirically the effects of this law.

Keywords: Financial contracts, Credit Card Accountability Responsibility and Disclosure Act, holdup, risk-based pricing, credit supply

JEL Classification: D14, D18, D86, G28, K12

Suggested Citation

Hong, Suting and Hunt, Robert M. and Serfes, Konstantinos, Dynamic Pricing of Credit Cards and the Effects of Regulation (2018-11-07). FRB of Philadelphia Working Paper No. 18-23, Available at SSRN: https://ssrn.com/abstract=3280765 or http://dx.doi.org/https://doi.org/10.21799/frbp.wp.2018.23

Suting Hong (Contact Author)

ShanghaiTech University - School of Entrepreneurship and Management ( email )

100 Haike Rd
Pudong Xinqu, Shanghai
China

Robert M. Hunt

Consumer Finance Institute, Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3806 (Phone)
215-574-7101 (Fax)

Konstantinos Serfes

Drexel University ( email )

3220 Market Street
Philadelphia, PA 19104
United States
215-895-6816 (Phone)
215-571-4670 (Fax)

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