Who Pays For Your Rewards? Redistribution in the Credit Card Market

79 Pages Posted: 7 Jun 2022 Last revised: 17 Jan 2024

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Andrea Presbitero

International Monetary Fund (IMF); Centre for Economic Policy Research (CEPR)

André F. Silva

Board of Governors of the Federal Reserve System

Carlo Wix

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: December 5, 2022

Abstract

We quantify redistribution between consumers in financial markets comparing cards with and without rewards. Regardless of income, sophisticated individuals profit from reward cards at the expense of naive consumers. We exploit bank-initiated account limit increases to show that reward cards induce more spending, leaving naive consumers with higher unpaid balances. Naive consumers repay credit cards following a sub-optimal balance-matching heuristic and incur higher costs. Banks incentivize the use of reward cards offering lower rates. We estimate an aggregate
annual redistribution of $15 billion from less to more educated, poorer to richer, and high to low minority areas, widening existing disparities.

Keywords: household finance; credit cards; financial sophistication; rewards

JEL Classification: D12, D14, G21, G40, G51, G53

Suggested Citation

Agarwal, Sumit and Presbitero, Andrea and Silva, André F. and Wix, Carlo, Who Pays For Your Rewards? Redistribution in the Credit Card Market (December 5, 2022). Available at SSRN: https://ssrn.com/abstract=4126641 or http://dx.doi.org/10.2139/ssrn.4126641

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Andrea Presbitero

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

André F. Silva

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Carlo Wix (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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