Regulatory Interventions in Consumer Financial Markets: The Case of Credit Cards

62 Pages Posted: 24 Jun 2019 Last revised: 21 Sep 2020

See all articles by Manolis Galenianos

Manolis Galenianos

Royal Holloway, University of London

Alessandro Gavazza

London School of Economics & Political Science (LSE) - Department of Economics

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Date Written: August 26, 2020

Abstract

We build a framework to understand the effects of regulatory interventions in credit markets, such as caps on interest rates and higher compliance costs for lenders. We focus on the credit card market, in which we observe U.S. consumers borrowing at high and very dispersed interest rates, despite receiving many credit card offers. Our framework includes two main features that account for these patterns: endogenous effort of examining offers and product differentiation. Our calibration suggests that most borrowers examine few of the offers that they receive, thereby foregoing cards with low interest rates and high non-price benefits. The calibrated model implies that interest rate caps reduce credit supply modestly and curb lenders' market power significantly, leading to large gains in consumer surplus, whereas higher compliance costs unambiguously decrease consumer surplus.

Keywords: Search Frictions, Credit Markets, Regulation

JEL Classification: D83, D14, G28

Suggested Citation

Galenianos, Manolis and Gavazza, Alessandro, Regulatory Interventions in Consumer Financial Markets: The Case of Credit Cards (August 26, 2020). Available at SSRN: https://ssrn.com/abstract=3405897 or http://dx.doi.org/10.2139/ssrn.3405897

Manolis Galenianos

Royal Holloway, University of London ( email )

Horton Building
Department of Economics
Egham, Surrey TW20 0EX
United Kingdom

HOME PAGE: http://www.manolis-galenianos.org/

Alessandro Gavazza (Contact Author)

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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