The Hidden Role of Contract Terms: Evidence from Credit Card Minimum Payments in Mexico

Management Science, Forthcoming

56 Pages Posted: 19 Apr 2021 Last revised: 6 Aug 2021

Date Written: February 11, 2021

Abstract

This paper argues that thresholds in financial contracts act as implicit nudges in consumers’ decisions. Exploiting a regulatory change to credit card minimum payments in Mexico, we find that a one percentage point change in minimum payments leads to a 0.87 pp change in actual payments, both expressed as a percentage of total balances. We decompose the total effect of minimum payments into a constraining effect and a reference effect. The former captures the effect of minimum payments as a binding constraint and accounts for 59% of its total effect. The later captures any remaining impact of changes in minimum payments beyond their constraining effect and represents 41% of the total. In turn, 67% of the reference effect is explained by the multiple heuristic: the tendency of consumers to pay whole-number multiples of the minimum payment.

Keywords: Credit Cards, Minimum Payments, Nudges

JEL Classification: D03, D11, D14, G00, G02, G21, G28

Suggested Citation

Medina, Paolina C. and Negrin, José Luis, The Hidden Role of Contract Terms: Evidence from Credit Card Minimum Payments in Mexico (February 11, 2021). Management Science, Forthcoming , Available at SSRN: https://ssrn.com/abstract=3826474

Paolina C. Medina (Contact Author)

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4218
United States
2248030929 (Phone)

José Luis Negrin

Banco de Mexico ( email )

Av. 5 de Mayo 18
Piso 4
Col. Centro 06059, 06059
Mexico

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
50
Abstract Views
370
PlumX Metrics